What Are Capped Rate Mortgages?

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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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