Capped Rate Mortgages

Capped rate mortgages are a type of interest repayment variation. As there are benefits to both variable rate mortgages and fixed rate mortgages, lenders have tried to capture all of these benefits with a capped rate structure. However, these mortgages are not the best option for everyone, so it is important to do your research before agreeing to one.

How Capped Rate Mortgages Work

Capped rate mortgages are variable rate mortgages with a twist. Instead of allowing the interest to continue increasing year after year, these mortgages put a cap on the interest rate. In other words, no matter what interest rates do in the market, these mortgages will never exceed the cap placed on the interest rate at the beginning. However, if the rate falls, your interest rate will also fall.

Benefits of Capped Rate Mortgages

Of course, the obvious benefit of capped rate mortgages is the chance that your mortgage interest rate will fall. Also, if interest rates shoot up, you will never have to pay more than the capped rate on your mortgage. This protects you, while allowing you to benefit from the drops in interest that happen.

Downsides to Capped Rate Mortgages

Of course, this mortgage scheme would be perfect in an ideal world. There is, however, the proverbial catch. First, the number of capped rate mortgages available is limited, which cuts down on competition. This can mean that the opening interest rate is higher than a fixed rate mortgage. The only way that you can benefit in this situation is if the interest rate drops. The market is getting slightly more competitive, though, so you may be able to find a capped rate mortgage that has an interest rate equal to or slightly lower than a fixed rate mortgage would have.

Also, you will have to pay for the privilege of having a capped rate mortgage. You will pay an admin charge of between £95 and £200 for this type of mortgage. This is not necessarily bad, however, if you look at the fee in light of how much you would be paying in a variable rate mortgage that suddenly increased dramatically.

While you will not find many options out there when shopping for capped rate mortgages, there are some. Therefore, you will want to shop around to make sure you are being offered the best deal. An independent financial advisor who is well versed in the world of capped rate mortgages will also help you know which lender is the best to choose.

To Apply for a capped rate mortgage please visit our mortgage quote comparison form.