Capped Rate Mortgages
How do capped rate mortgages operate?
A capped mortgage works to some extent just like a variable rate mortgage, where the mortgage interest rate is linked to the Bank of England’s base interest rate. When the base rate goes down, your monthly payments decrease, and if the base rate goes up, the repayments increase. The benefit is that compared to fixed mortgages you can save money if the base rate collapses. But a high base rate rise can result in high monthly repayments which may cause financial problems. A capped rate mortgage is a protection against such a scenario.
A capped mortgage has got a maximum rate that performs as a maximum threshold. A capped mortgage will be in some way like a variable rate mortgage except if the maximum rate is hit. If this maximum threshold is reached you just have to pay the maximum rate agreed in your mortgage contract.
What’s so good about capped rate mortgages?
Capped mortages are the perfect compromise between 2 mortgage types: the fixed rate mortage and the variable rate mortgage. The monthly payments will fluctuate with the Bank of England’s base rate, there is however a limit to how high they can go. This gives you a defense against high interest rates, which means you will know in advance what is the highest monthly payment you may have to face.
You have two advantages - the guarantee of a fixed rate mortgage and the potential savings of a tracker mortgage. Although your repayments fluctuate, they can’t go beyond a certain amount. This can give you a protection against high interest rates if you are on a limited budget but wish to apply for a variable rate mortgage.
What are the disadvantages of a capped mortgage?
The protection a capped rate mortgage gives you does not come free, and the capped mortage rates are generally higher than variable of fixed rate mortgages. In the case of some capped mortages, lenders may include a minimum rate or ‘colar’, which acts as a minimum amount the monthly payments cannot go under. This means that if the base rate plunges, you may lose some of the benefits associated with a tracker mortgage.
Mortgage lenders normally set the capped rate higher than what they think the Bank of England’s base rate is likely to be in the future, so there may be no benefit in having a capped rate mortgage instead of a tracker mortgage. We recommend that you get in touch with an independent adviser to find out if a capped mortgage is the best way to save money.
Are there other types of mortgages I could be interested in?
For fixed repayments you should consider going for a fixed rate mortgage. If you’re interested in saving at the beginning of your mortgage term, a discount mortgage could be a good option . To save on your overall mortgage cost, you may wish to have a look at variable rate or tracker mortgages.