Capped Rate Mortgages

Capped rate mortgages are standard interest-only or repayment mortgages where the interest rate is guaranteed not to rise above a set level for a specified period of time. The interest rate is usually linked to the Bank of England's base rate, which means that the interest rate can change during the 'capped' period, but will not exceed the set limit. Most capped rate mortgages also have a minimum level (referred to as the 'collar'), which means that although the interest rate may change during the set period, it will not rise above, nor fall below a certain level.

Since the interest rate is guaranteed to remain within certain limits, it is easier to budget for your monthly repayments because the interest charge is guaranteed not to fall, nor rise, above a certain level. Nevertheless, capped rate mortgages tend to start with higher interest rates than a fixed-rate or discounted deal, which can make this type of mortgage more expensive. This is primarily because you are protected against rising interest rates, while still being able to take advantage of falling interest rates, which reduce the cost of your mortgage payments. There are usually higher administration fees associated with this type of mortgage. These additional costs could reduce the overall benefit of choosing this type of mortgage.

It is sometimes difficult to find a capped rate mortgage that best suits your needs, since there may be few deals from which to choose. You may wish to seek professional financial advice before you make your final decision.