Capped Rate Mortgages

What are Capped Rate Mortgages?

A capped rate mortgage puts a maximum limit on the payable rate you have to pay. However, should the lender's standard variable rate be below the level at which the cap is set, you get to pay that amount. This is a product that puts together one of the most attractive aspects of a fixed rate mortgage, that you know where your mortgage is going to rise to at worst and are guaranteed it not going any higher. It mixes it with a variable rate mortgage, where if base rates go down, your mortgage pay rate will follow it down.

Capped rate mortgages usually last for a few years. This is on average around five years, but it is possible to find capped rate mortgage lasting for the entire life of the loan. Furthermore, the added sophistication of the mortgage market means that you can get some capped rate mortgages with introductory discount periods.

A further development of the capped rate mortgage is the 'Cap and Collar' mortgage, which some wags have suggested sounds like a fetish, but is in fact when you have a cap limiting the maximum pay rate, and a collar, limiting the minimum pay rate. This product means that you are hedging your bets in both directions, and will mean that your cap is set lower than with a normal capped mortgage in return for you accepting the collar. As long as the cap and collar period exists, your mortgage rate will remain within a set margin.

The advantages of the capped mortgage is that when interest rates are likely to rise, they offer protection for borrowers against repayments going over a certain level. Thus, they are seen as being almost as attractive as fixed rate mortgages, although fixed rate mortgages are set a good deal lower than capped rate mortgage will be. It makes it easier to budget for your expenses when you know what is the highest amount your payments could be. Remember that in addition to this, you can enjoy the benefits of any cuts made to the lender's SVR.

The disadvantage of the capped rate mortgages is that the rate payable on them is still usually higher than that available on comparable fixed or discounted rate products. This is even with the existence of discounts in conjunction with the caps. So, capped rate mortgages are a conservative choice, as you won't get the cheapest rate on the market.

Should the rate go higher than your cap level, you would have been better off with a fixed rate mortgage, and if the rate falls, a discount mortgage would have been better value.

Look out for redemption penalties, during both the capped period, and also overhanging after the cap rate is finished.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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