One of the most important factors you will need to consider when you take out a mortgage is the interest rate. When you borrow such a large amount of money, the interest you’re charged can have a significant effect on how much you pay back each month.
A capped-rate mortgage has a variable interest rate, meaning the amount of interest that you pay can change throughout the mortgage. However, unlike other variable-rate mortgages, capped rate deals have a cap- or upper limit- to how much interest you can be charged.
This can be useful when it comes to planning your budget and give you peace of mind, knowing that your payments will never be higher than the cap.
Continue reading for all the Capped Rate mortgage details including the pros and cons.
Capped Rate Mortgage: How Does It Work?
Capped-rate mortgages are usually repayment-style mortgages, meaning that each month some your money goes towards the capital you borrowed and some goes towards the interest. The amount of interest you’re charged can change, but will never be more than the cap set by your lender.
Changes to the interest rate depend on the kind of mortgage you have and can be influenced by both the lender and the broader economy. Usually, there is no limit to how high the interest rate on a variable mortgage could climb. However, with a capped mortgage, your lender guarantees that you will never be charged more than limit set when you sign up to the deal. This has the potential to save you money while at the same time giving you security.
For example, if you were to take out a 3% tracker mortgage, which ‘tracks’ the interest rate set by another institution (most commonly the Bank of England), the interest charged on your debt at any given time would be 3% above the tracked rate.
If the Bank of England set its base rate to 1.5%, you would be charged 3% more than this on your mortgage: so 4.5% interest. If the Bank raised its interest rate to 3%, your mortgage’s interest rate would increase accordingly, to 6%. However, if your tracker mortgage was capped at 5%, you would never pay more than this- even if the Bank of England raises its base rate to 3%.
Capped mortgage deals offer security because you know your mortgage payments will never exceed a certain amount. The base interest rate on capped deals tends to be slightly higher than on uncapped deals, as the lender will miss out on earnings when interest rates rise.
Capped Rate Mortgage: ‘Cap and Collar’ Mortgages
Capped mortgages are often sold to include a ‘collar’, or minimum interest rate. If your mortgage has a collar, you will never be charged less than the interest rate set by the collar.
Normally the collar is defined as the interest rate at the time when you took out the mortgage. This means that you can only overpay the same or more on your mortgage; even in interest rates fall, you won’t be able to cash in on the drop.
If interest rates are already low at the time you take out your mortgage, you might decide to overlook the drawbacks of a collar.
Capped Rate Mortgage: Who Is It For?
Capped mortgages are a good option for people who can tolerate some risk, want to take advantage of low-interest rates and can budget for increases in their mortgage payments.
The most attractive aspect of capped rate mortgages is the promise that your repayments will never creep above a certain level, although some caps are set quite high.
It is essential to consider whether you could afford to make mortgage repayments if the interest rate were to rise and remain at the cap for an extended period.
|Lenders Standard Variable Rate||18%|
|Fixed for 2 to 5 years||18%|
|Fixed for 5 years or more||14%|
|Fixed for less than 2 years||9%|
|Discount Variable Rate||4%|
|Capped Variable rate||3%|
Capped Rate Mortgage: How Long Does It Last?
Capped mortgage deals are usually temporary and last for two to five years. There often are fees for leaving the mortgage before the end of this time frame.
At the end of the introductory period, you will be automatically moved onto your lender’s standard variable rate. This is a no-frills, variable rate mortgage with no special discounts. It is usually not as competitive as a lender’s other mortgages, and for this reason, your payments could go up at the end of the capped deal.
However, most standard variable rate mortgages have low, or no, early repayment fees; so once your lender has moved you over, you should be able to remortgage for a better deal without having to pay any costly exit fees.
Capped Rate Mortgage: What Are the Pros and Cons?
There are some definite advantages to capped rate mortgages.
Still, as with all relevant financial decisions, you should think about the advantages and disadvantages before deciding whether one is right for you:
|Offers peace of mind, as the maximum you will ever have to pay each month is clear from the outset||You will need to budget for variations in your mortgage payments, as they can still rise up to the point of the cap|
|Ensures you will always be able to budget for your mortgage payments||Many capped-rate deals come with a collar which can stop you from getting the lowest interest rates when the market dips|
|Moving house or remortgaging before the deal ends can entail costly get-out fees|
|Interest rates on capped deals tend to be higher than with uncapped variable deals.|
How Can The Mortgage Bank Help?
Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.
They have already helped thousands of people get the best remortgage deal even people that have been refused before, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.