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