One of the benefits of variable-rate mortgages is being able to save money on your repayments when interest rates fall.
However, some mortgage contracts feature limits as to how low your interest rate can go.
This is known as a collar and is important to be aware of if you are hoping to cash in on low-interest rates.
What Is a Mortgage Collar?
A mortgage collar is an interest rate set by the lender, below which the interest rate of the mortgage cannot fall. It may sometimes be accompanied with a cap, which does the opposite; ensuring that the interest rate charged on a mortgage never goes above a certain level.
When you take out a mortgage, you are charged interest on your loan, which forms part of your repayment every month. Mortgages can have fixed interest rates, where the amount of interest charged stays the same for a set period of time; or they can have variable interest rates where the amount of interest goes up and down.
Normally, if your mortgage has a variable interest rate, this means that the interest rate changes the performance of the economy- of the Bank of England’s base rate, in the case of a tracker mortgage.
When the interest rate goes up, your mortgage payments follow, and when the interest rate falls, your mortgage payments become less expensive.
There are benefits and risks to variable-rate mortgages for both lenders and borrowers. When interest rates are high, borrowers pay the price as lenders make more profits- however, when they fall, lenders’ profits fall, as borrowers make savings.
As a result, some lenders may try to counter the risk of a variable rate mortgage becoming unprofitable by placing a collar on it. This is the minimum amount of interest that the lender will charge even if interest rates plummet elsewhere in the market.
For example, tracker mortgages normally follow the Bank of England’s base rate at a fixed margin above it. On a 2% tracker mortgage, your interest rate would always be 2% more than the base rate charged by the Bank of England.
On a mortgage with no collar, this means that if the base rate fell to 0.5%, you would stand to benefit from a low-interest rate of 2.5% on your mortgage.
However, if your lender put a collar in place at 3%, the minimum interest you would ever be charged is 3%, even if the base rate fell to a very low level.
Are There Any Benefits to Mortgage Collars?
It may seem like mortgage collars strip away the main benefit of variable rate deals by preventing borrowers from saving money when interest rates are low.
While this may be so, many mortgages which feature collars also feature ‘caps’. A cap is the opposite of a collar. It is a maximum interest rate designed to limit the risk for the borrower.
In this way, borrowers may avoid the risk of not being able to afford their mortgage payments when interest rates start to climb.
Mortgages which feature both of these limits are known as ‘cap and collar’ mortgages.
What Kind of Mortgages Has Collars?
Any kind of variable rate mortgage can have a collar. Some mortgages may be advertised as cap and collar mortgages, but not all mortgages with collars are obviously advertised as having one.
How Do I Know if My Mortgage Has a Collar?
If you are interested in getting a variable rate mortgage, it is a good idea to check with your lender whether there is a collar on it.
If you already have a mortgage, you should be able to see in your mortgage contract whether there is a collar on the interest you can be charged.
Pros and Cons of Mortgage Collars
|Many ‘collared’ mortgages also feature caps, which provide assurance that your mortgage payments will never be more than a certain amount||Prevents you from making the most savings at times when interest rates are low|
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 mortgage 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.