Capped rate mortgages

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What are the benefits of a capped rate mortgage?

Capped rate mortgages offer the advantages of both variable rate mortgages and fixed rate mortgages - that is, your repayments won't go up if the basic interest rate changes, but they may go down. In this sense, capped rate deals can offer the best of both worlds.

A capped rate mortgage has a maximum interest rate for a given term – a ‘cap’. The amount of interest you’ll pay will not go higher than the agreed capped rate. That means you’ll know the maximum amount which your monthly payments could rise to. On the other hand, if the basic interest rate falls below the capped rate, your repayments will go down. You benefit from falling interest rates but are protected from rate rises.

These capped rate mortgages may also have what's known as a 'collar'. That's when the lender sets a minimum level - which the rate you pay will not fall below.

Sounds ideal - are capped rate mortgages readily available?

In practice, there are only a limited number of these deals on the market. The availability of capped rate mortgages can also be heavily affected by the state of the market at any one time. When it looks as if a sharp rise in rates is on the cards, lenders may be unwilling to commit to competitive capped deals which could lose them money in the long run. Ironically, it is when the market is in this precise state that the demand for capped rates reaches its peak.

Capped rate mortgages may not be that competitive, because the interest rate you will be paying is likely to be higher than your average fixed rate mortgage or discounted rate mortgage.