Personal Finance

What is a capped mortgage?

A capped mortgage is a variable rate mortgage with a capped limit beyond which the rate paid will not exceed.

Mortgages are available in a number of different interest rate options, one of which is the capped rate.

A cap means that there will be a limit to any increase in the variable rates for a selected term. The mortgage rate charged on your account can not exceed this rate. However if the variable rate drops below your capped rate you will benefit, as your repayments will be calculated using the lower variable rate. Capped mortgages enable you to place a limit on your monthly mortgage commitments and still benefit from falls in interest rates.

Capped rate mortgages put a limit on the highest rate of interest you will have to pay on your mortgage over an agreed introductory period. This means you’re protected to a certain extent if interest rates rise, and if they stay low you will still benefit from the lower interest rates. It’s basically a combination of the fixed rate mortgage concept with a standard variable rate mortgage, allowing you to profit from decreasing interest rates.

A capped rate mortgage is a variable rate mortgage which has a fixed upper rate limit. This means that the borrower knows in advance the highest monthly payment that he may have to make.

One advantage of the capped rate mortgage is that when interest rates are likely to rise, they offer protection for borrowers against repayments going over a certain level. This can be seen as being almost as attractive as a fixed rate mortgage. Having a capped rate mortgage can make it easier to budget when you know what the highest amount your mortgage payment could be.

Be aware that this type of mortgage usually charges redemption penalties to those who wish to swap mortgage provider.

Capped rate mortgages are generally a compromise between fixed rate and variable rate mortgages.

Whilst providing peace of mind capped rates are generally more expensive than fixed or discounted rate products.

About the author
John Mussi is the founder of Direct Online Loans who help UK homeowners find the best available loans via the website.