Capped rate mortgages
A capped rate mortgage offers you the option of knowing the maximum
monthly repayments you would have to make during a set period, typically
two or three years.
Capped rates work in a similar way to variable rates but offer
similar security to fixed rates. The initial interest rate will
be set but will vary in line with interest rates. The rate will
however not exceed a specified upper limit (the cap) for the set
period.
Advantages of a capped rate mortgage
- A capped rate mortgage offers you the security of
knowing the maximum you could be repaying during the capped rate
period, which should
make budgeting easy
- You may benefit from a reduction in interest
rates although if a ‘collar’ applies there may be
a limit below which the rate you pay will not fall
Drawbacks of a capped rate mortgage
- Rates may be higher than for
a short term fixed rate mortgage
- Some capped rate mortgages have
a 'collar' or lower limit below which the rate you pay cannot
fall, therefore limiting any benefit
you gain from falling interest rates
- There are currently relatively
few capped rate mortgage deals on the market
- Early repayment charges
are likely to apply for at least the term of the capped rate
period
- Some capped rate mortgages have an “overhanging” early
repayment charge. This means that an early repayment charge applies
for a longer period than the capped rate period
- There is generally
an arrangement or booking fee payable for a capped rate mortgage
- After
the capped rate period ends, you will normally have to pay the
lender’s standard variable rate - so there may be a
large increase in your monthly repayments, particularly if interest
rates
have risen during the capped rate period