For the added comfort and security of knowing monthly interest payments will never go beyond a certain amount, even in times of high interest rates, a capped rate mortgage is ideal.
What is a Capped Mortgage?
Capped rate mortgages work using the same principle as variable rate mortgages, in which monthly interest payments will vary depending on the movement of a standard variable rate set by mortgage lenders, which is generally based on with the Bank of England base rate. The difference between the two mortgages, however, is that with capped mortgages the interest is capped at a certain amount, meaning the borrower will never pay above this set limit. The interest rate will continue to rise or fall, and the borrower will continue to pay this amount, yet when the variable interest rate reaches the cap, or ceiling, he or she will only pay the capped rate until the variable rate drops below this capped rate again.
Capped Mortgage Rates
Mortgage lenders set this cap rate, which will have been agreed in advance with the borrower. It is frequently higher than variable or fixed rate starting prices simply because of the benefits received from using a capped mortgage. These capped mortgage rates usually have a clearly set minimum amount to which the rate can fall, known as the collar rate. Though capped rates can save money, anyone taking one up could still potentially lose out if rates drop below this collar rate because the rate paid will not fall alongside it.
The term of a capped mortgage is usually for only an introductory period of two to five years, after which the mortgage will almost always go onto the lender’s standard variable rate or tracker rate for the remaining mortgage term.
Advantages of Capped Rate Mortgages
This mortgage repayment method will be of great benefit to people during periods of high interest rates as the mortgage cap can result in lower monthly payments, a protection not offered by more traditional types of mortgage. Capped types, therefore, provide peace of mind of knowing that payments will not go above a certain level.
Disadvantages of Capped Rate Mortgages
However, capped rate mortgages are not appropriate for all borrowers as there are certain disadvantages to them. On the whole, a capped mortgage rate is slightly more expensive than rates provided by other mortgages due to the privilege of having monthly interest payments capped. Furthermore, flexibility of such a mortgage is limited: remortgaging can be costly (especially due to the mortgage fees attached), and early re-payment penalty charges can be high.
As one of the more ‘rare’ types of mortgage, capped rate mortgages are not as readily available as other types of mortgage loans, but there are some good capped mortgage deals to be found on the market, via lenders or mortgage brokers. Whether or not to take out a capped rate mortgage should, however, be carefully considered as some deals that promise to save money when interest rates rise may in fact end up costing more than some fixed rate mortgages. Account should also be taken of all additional mortgage fees involved when comparing capped rate mortgages.