Capped Rate Mortgage
Mortgage options
A capped rate mortgage is in fact a variable rate mortgage with a distinct difference.
A capped rate mortgage interest rate will still go up and down inline with the general interest rate but there is built in a ceiling known as the ‘capped rate’ that the interest rate levied on your capped rate mortgage will not exceed.
This means that when your interest rate increases it can never exceed the set ‘capped rate’ so that your payments will not jump continually to meet the demands of a fully fluctuating variable rate.
If the mortgage rate falls then these types of mortgages have a ‘collar rate’ that the interest rate levied on your mortgage will not go below.
A capped rate mortgage usually charges a higher interest rate in the short term than a less controlled variable rate type mortgage. Once again you should always seek independent advice from your mortgage advisor before you commit to borrow the money.
The theory of a capped rate mortgage is that they are designed to offer the best of both worlds in terms of the flexibility of a variable rate mortgage combined with a fixed rate deal.
When you take a capped rate mortgage you effectively agree to a cap being placed on the maximum amount of interest rate that could be charged to your mortgage over a given period whilst allowing the interest rate to reduce down to a lower level but fixed at a collar rate beyond which it will not fall below.
The good points of a capped rate mortgage is if the variable rate increases higher than your capped rate you only pay the interest at the set cap rate and nothing beyond it. You can then benefit from falling interest rates and you never pay more than the higher cap rate agreed to at the outset. This enables you some degree of flexibility and restricts the concerns you may have on any escalating interest rates.
The bad points of a capped rate mortgage is that there are only a limited number of lenders offering a capped rate mortgage so you are limited for choice. The starting point of the interest rate is usually higher than those rates offered on fixed rates or discounted rate mortgages. There is also an admin charge levied at the outset which can vary from £95 to £200.
If you like the flexibility of a variable rate mortgage with a capped ceiling on the highest interest rate that can be charged then a capped rate mortgage could be the preferred mortgage for you.
When you take out your capped rate mortgage your mortgage lender provides you with 2 interest rates. The interest rate you will start paying at the outset and the maximum capped rate of interest they can levy on your mortgage. The starting rate will be based on their Standard Variable Rate but will usually be slightly higher than other more competitive variable rate deals.
Once your capped rate is applied you will not have to pay any higher charges even if the bank of England keeps increasing the base rate.
There is a down side that the capped rate lenders would normally set their starting rate at a less competitive rate from the outset to possibly cover the risk to the lender.
