Capped Rate Mortgage

This is a mortgage that is guaranteed not to rise above a specific rate (the 'cap') within a set period, therefore a capped rate mortgage could be an advantage to borrowers as it offers protection against repayments going over certain levels. Should the interest rate rise during the predetermined capped rate period agreed, the borrower still pays the predetermined capeed rate only. These types of mortgages usually last for a couple of years, however you may be able to find capped rate mortgages with longer term times. The Capped Rate mortgage can be a useful tool in helping to combat sudden increases in monthly bills which can make all the difference. The length of time that the Capped Rate extends to will depend on the specific mortgage lender and the mortgage offered.

A rapid increase in interest rates can have a substantial effect on the amount of money a borrower has to pay back on a monthly basis. Typically, when new owners move into a home they have a number of associated expenses to consider such as furnishing or decoration not to mention the everyday costs of living and it makes the need for predictable spending patterns even more important.

• With a capped rate mortgage the interest rate is capped for an agreed period. If interest rates fall below the “capped rate” you pay the lower rate. If interest rates rise above the “capped rate” then you pay the (lower) capped rate.

Capped mortgages can run the whole length of the loan and can offer introductory discount periods. If you cap the interest rate on your mortgage it can help you to budget, as you will know that your mortgage repayments will not go over a set amount each month, this means you are aware of how much money you have left at the end of each month.

There are mortgages that have what is called a cap and collar. The cap is the limit set on the maximum rate while the collar is the minimum pay rate. The cap is lower than a normal capped mortgage so as entice you to accept the collar. Your mortgage rate will stay within these two for the agreed term of the cap and collar mortgage.
There is a maximum limit that is payable on a capped mortgage so if the lenders variable rate is below the level of the cap rate you will only pay that lower amount.