Capped Rate Mortgages – The Essentials
April 14th, 2011 | 
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Capped rate mortgages are in a lot of ways a mix of a variable rate mortgage and a fixed rate mortgage. They act like fixed rate mortgages in that they’ll not climb above a particular level – this is actually the cap. Plus they are generally much like variable rate mortgages in that your payments can change on a month to month basis in accordance with the Bank of England’s base rate, so any reductions in the base rate should see comparable falls in rate of your mortgage.
Some lenders now put a floor, also known as a collar, on how low your mortgage rate can go but at least you’ll be shielded if the base rate rises above a specific level. Your interest rate will rise with the base rate however only up to a certain level. Once it actually reaches the ceiling, or cap, your repayments will stay precisely the same.
The positives and negatives of capped rate mortgages
The important positive, in some ways, is having the very best of all possible worlds – fixed and variable. If rates go above the cap on your contract you’ll be protected and when interest rates fall you will also benefit.
You will pay a premium for having the best of both worlds. There are not that many of these deals around so they are not that competitively priced. On the whole you will pay a higher rate than the equivalent fixed rate mortgage and you also could lose out if interest rates go lower than the “collar” set in your arrangement. Mortgage companies are constantly analysing the markets as well as the economy. Most likely they won’t set the cap much beneath the maximum they expect rates of interest to reach anyway and if that’s the situation you wouldn’t have much to gain from the cap.
Bear in mind nonetheless that mortgage offers do differ from lender to lender and on a daily basis so always talk with a professional mortgage consultant who will help you identify the best home loan for your needs.
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