Capped rate mortgages are a type of variable rate but with the difference that they have an interest rate cap.

This essentially means that although you can still be subject to fluctuations during the lifetime of the rate, you can guarantee that the interest rate charged will not rise above a certain level for an agreed period.

This type of mortgage offers security as you are able to set a maximum amount that you are able to pay over the set period. In addition, you will benefit from lower payments if your lender’s standard variable rate (SVR) was to fall.

The capped rate tends to be higher than what you might pay on other rates, as you are paying for the security that the cap provides. Once the capped rate period is over, you will automatically return to the lenders SVR or a tracker rate for the remaining term of the mortgage. You can choose to stay with your current lender or remortgage to a better deal if you want.

It is important to note that not many lenders offer capped rate mortgages at this point in time.

How does a cap work?

If you have an initial 3.0% interest rate, with a cap set at 5.0% for 2 years from the start of the mortgage, rest assure that if the lender increases the variable for all other customers to 5.50%, you will still only need to pay 5.0% as per your agreement.

Additionally to implementing a cap, a minimum lower limit can be put in place, referred to as a ‘collar’. This would mean that a margin would be included that any decreases cannot exceed during the agreed period.

How does a collar work?

If you have an initial 3.0% interest rate, with a collar set at 1.0% for 2 years from the start of the mortgage, if the lender was to decrease the variable for all other customers to 0.50%, you will still need to pay 1.0% as per your agreement.

Advantages of a capped rate mortgage

  • You have security that the variable rate will not rise above the limit set
  • If interest rates fall you will be able to enjoy a lower rate

Disadvantages of a capped rate mortgage

  • Although you have a limit in place, interest rates can still rise to this amount
  • Capped rates tend to be more expensive