Capped Rate Mortgages
Capped rates are rare, so if you’re going it alone, you’ll have to search well to find a selection of rates to choose from
Capped rate mortgages are in effect variable rate mortgages. However, they have one important difference. That important difference is: capped rate mortgages have an interest rate ceiling, known as the “Cap” above which your repayments can’t rise.
Mortgages with a capped rate are usually set up over an introductory or initial period. These initial periods tend to be anything from two to five years. Rates of this type aren’t as easy to find on the mortgage market as say fixed rate mortgages, but there are normally a few providers offering them from time to time.
How does a capped rate mortgage work?
Like fixed rate mortgages, capped rates give you an element of payment security. They guarantee that your mortgage payment will not go above a certain amount for a certain period of time. However, these rates are still variable, as they can move both up and down, meaning your payments can rise and fall, but the rate payable can’t go up above the cap level.
Capped rate mortgages normally have a higher starting interest rate when compared to other rates, for example tracker rates. This is mainly because you’re paying for the added security of knowing that there’s a cap, beyond which you can’t rise.
Also, there’s usually an Early Repayment Charge if you want to remortgage to another lender or pay off the mortgage in full. In most cases you’ll be allowed to make some over-payments, but the amount you can over pay will be restricted.
Once the introductory or capped rate period has ended, your mortgage will go onto a lender’s Standard Variable Rate or a tracker rate for the remaining term. You might consider a rate switch or remortgage at this point.
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Advantages & Disadvantages
With a capped rate mortgage you have peace of mind knowing that your payments won’t go above a certain level.
Interest rates can still go up on a capped mortgage, but only as high as the cap. Therefore, you should calculate your budget carefully to make sure you can cope with any rise in rates up to your cap. Your mortgage adviser will discuss this with you and provide an idea of what repayment amounts might be expected at different rates.
Capped rates are rare, so if you’re going it alone, you’ll have to search well to find a selection to choose from.