Capped Rate Mortgage
The capped rate mortgage is widely seen as a compromise between your typical fixed rate and variable rate packages.
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It works in a similar way to the variable rate deals, with the difference being that there’s a cap to prevent your interest payments from exceeding a certain figure. So say for example that you’re making repayments at the standard variable rate of 5.5%, by taking a capped rate mortgage of 6%, you can ensure that you never pay more than 6% - even if there’s a dramatic rise and everybody else is paying more for their money!
While this provides some of the security that you’d expect from a fixed rate mortgage, you’re also perfectly placed to take advantage of any drops in the interest rates. The cap is only applicable to the upper ceiling of rates. It won’t affect how low they can go.
The advantages are quite obvious to see. If you’re sitting down preparing a budget for the year, it’s a nice fallback to know that there’s a figure which is the absolute maximum and that you won’t be exceeding it. Of course, some of us are a little greedy though. It’d be great to have the flexibility to join the party if rates started to fall.
In many ways, the capped rate mortgage is one of the most satisfying of the bunch. It provides the middle ground between security and interest skimming cutbacks.
Looking at its drawbacks, you’ll typically find that a capped rate deal is more expensive - especially when you place it against the fixed rate deals, or a discounted variable rate.
They’re also not the most widely available packages on the market. Mortgage dealers have had a recurring knack of avoiding the capped rate deal, or raising the cap so high with inflated charges that you needn’t have bothered in the first place. It can be tough to strike a balance between the best of the fixed and variable worlds, as opposed to using just one of them and getting a better competitive deal.
Unfortunately, capped rate homeowners also suffer from a large number of extended tie-ins. Just like fixed mortgages, you can expect to be faced with hefty redemption charges should you try to pay it off before the term is complete. And it’s equally difficult to hop from mortgage to mortgage when you’re tied in to a capped rate package.
Don’t look past the fact that your capped rate mortgage will still be linked directly to the broker’s standard variable rate. It’s a good idea to have a nose around the market and sniff out the best deals, but pay close attention to the small print. An appealing cap can often mean that you’re agreeing to sign away your ability to move around in the market. Re-mortgaging certainly becomes a problem and you can expect harsh penalties for a seemingly innocent foot out of line.
Capped rate deals aren’t all bad though. If you’re in the hunt for a long term deal with no ambition to switch from A to B on a regular basis, they can provide a nice balance of security and savings.
Find a capped rate mortgage with help from our
mortgage centre
