What Are Capped Rate Mortgages?
Hot Topics
- What Exactly is a Mortgage?
- A mortgage is basically a loan – a loan that is secured on the value of a property which you pay back over a given period of time.
- What Happens If I Want To Move Home?
- Moving home is basically the same as moving into your first home, in mortgage terms. You are free to find yourself another mortgage with either your existing lender or another lender – and can shop around for the best deal on the market.
- Is There Any Way I Can Lower My Monthly Repayments Without Switching Mortgages?
- If you find that you cannot afford your monthly mortgage repayments and do not wish to switch your mortgage to another lender – then you will need to negotiate new terms with your existing lender.
- How Do I Know If I Should Switch Mortgages?
- The mortgage market changes on a regular basis – and it is quite possible that just a few years after taking out your mortgage there will be plenty of better deals out there with more favourable interest rates.
- What are Variable Rate Mortgages?
- A variable rate mortgage is when you pay a standard variable rate (SVR) that changes in line with the Bank of England's base rate. The SVR is usually between 2% and 4% higher than the Bank of England's base rate, but this will vary from lender to lender.
A capped rate mortgage puts a limit on maximum interest payable on your mortgage over a predetermined period. If the mortgage rate is BELOW the cap the borrow will enjoy the lower interest rate available. A capped rate mortgage mixes the fixed rate mortgage concept with a standard variable rate mortgage, where if base rates go down, your mortgage pay rate will follow it down.
Capped rate mortgages typically only last for a few years, on average for around five years, it is possible to find capped rate mortgages that last for the entire term of the loan.
A variation on the capped rate mortgage is the 'Cap and Collar' mortgage, which is when you have a cap that limits the maximum interest rate, and a collar, that limits the minimum interest rate. This product allows the borrower to hedge their bets and will mean that the cap is lower than normal. As long as the mortgage is within the cap and collar period, your mortgage interest rate will remain within the set margin.
The capped mortgage offers protection for borrowers in a period of high interest rates and is able to prevent repayments going over a certain level. Thus, they are seen as being almost as attractive to borrowers as fixed rate mortgages, although fixed rate mortgages are set a good deal lower than capped rate mortgage will be. You are much more able to budget for your expenses if you know what is the highest amount your payments will be. You can also benefit if your lender cuts their current standard variable rate.
However, with capped rate mortgages, the interest rate payable on them is still usually above that of a like fixed or discounted mortgage product.
Be aware that you may face redemption penalties, during both the capped period, and also overhanging after the cap rate is finished.
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