What is a Capped Rate Mortgage?
A capped rate mortgage is a variable rate mortgage with a difference. Whereas, other variable rate mortgages can rise and fall to any level, capped mortgages have an interest rate ceiling, over which your interest rate cannot rise.
They are usually for an introductory period only typically between 2 and 5 years, after which your capped rate mortgage will most likely become a standard variable rate mortgage unless you negotiate better terms with your lender.
They are not a very common type of mortgage so there are usually just a few capped rate mortgages available at any one time if at all.
Use our useful mortgage comparison tool to see which mortgages are currently available.
How does a Capped Rate Mortgage work?
Capped rate mortgages work the same way as SVR mortgages with monthly interest payments set at the lender’s SVR rate which can fluctuate up and down. A capped rate mortgage however, will have a set upper limit, over which the interest rate can’t go.
In addition to a ‘cap’, a capped mortgage could also have a ‘collar’ which is set as a minimum amount to which the rate can fall.
A capped mortgage is usually offered for a short term of 2 to 5 years, after which the mortgage will usually automatically go onto the lender’s SVR for the remaining mortgage term.
Advantages of Capped Rate Mortgage
- When interest rates are low, your payments will be even lower. Although if there is a ‘collar rate’ set, you won’t benefit should interest rates fall significantly.
- Your payments won’t go above a certain level no matter what happens to interest rates giving you some peace of mind.
Disadvantages of Capped Rate Mortgage
- Rates are usually higher for capped mortgages than for other variable rates.
- There is usually limited flexibility so remortgaging could be costly if interest rates do rise.
- It is one of the rarer types of mortgages, so there are very few on the market to compare with.
When considering whether a capped rate mortgage is right for you or not, be aware that some deals may end up costing more than a standard fixed rate mortgage. Ensure you are aware of all the mortgage types available to you by reading our guide to mortgage types and most importantly, seek and contact one of our advisers for free