Capped Rate Mortgages

What are capped rate mortgages?

Capped rate mortgages are in some ways a cross between a variable or tracker rate mortgage and a fixed rate mortgage. They are similar to fixed rate mortgages in that they will not rise above a certain level – this is the cap. And they are similar to variable rate mortgages in that your payments can change on a monthly basis in line with the Bank of England’s base rate, so any reductions in the base rate should see similar reductions in your mortgage rate. Some lenders now put a floor (or collar) on how low your mortgage rate can go but at least you will be protected if the base rate rises above a certain level. Your interest rate will rise with the base rate ,but only up to a point. Once it reaches the ceiling, or cap, your payments will stay the same.

What are the pros and cons of capped rate mortgages?

Pros of capped rate mortgages:

The big pro, in some ways, is getting the best of both worlds – fixed and variable. If interest rates go above the cap on your agreement you will be protected and if interest rates fall you will also benefit.

Cons of capped rate mortgages:

You will pay a premium for having the best of both worlds. There aren’t that many of these deals around so they are not that competitive. On the whole you will pay a higher rate than the equivalent fixed rate mortgage and you could lose out of interest rates go below the “collar” set in your agreement. Lenders are constantly analysing the market s and the economy. In all likelihood they will not set the cap much below the maximum they expect interest rates to reach anyway and if that was the case you wouldn’t have much to gain from the cap.

Bear in mind however that mortgage deals do vary from lender to lender and from day to day so always speak to a professional mortgage advisor who will help you identify the most suitable home loan for your needs.