A capped rate mortgage is somewhat like a fixed rate mortgage in so much as the rate will never go above a certain level.
However unlike a fixed rate mortgage there is the added benefit that the rate being charged on your mortgage can also fall.
E.g. the lender sets an interest rate 'Cap' of say 5%. If rates rise above 5%, then your mortgage will not exceed that 'Capped' level. However, if the interest rate falls below the 5% 'Cap' then your mortgage interest rate would fall too. So the Cap prevents the interest rate rising above the Capped level, but allows you to benefit from a rate reduction.?
Please note the graph below is for illustrative purposes only.
The graph above shows how the rate you pay (shown by the solid line), reduces if the variable rate drops below the 'Capped' rate, thus allowing you to benefit from this reduction. This can sound like the best option to choose, as it appears to give you the best of both worlds!
However, Capped rate mortgages are not commonplace and are usually priced higher than the equivalent Fixed Rates. This is because the lender knows that they are taking more of the risk if the interest rate does indeed fall below that of the cap, meaning they will get less in interest payments!?
If you have a Capped Rate and interest rates fall below the 'Cap', then your monthly mortgage payments will also fall. If interest rates rise, then your monthly mortgage payments can only rise up to the Capped level.
Capped mortgages tend to be priced higher than their Fixed equivalent, so unless the economic outlook suggests rates are likely to fall, you may not see the benefit of the Cap.[p>
?As always it pays to take Independent advice from a specialist at the appropriate time and we will be happy to help you here!
Top Tip: The difference between Capped and Fixed Rates varies all the time, so it is very important to weigh up market conditions and expectations BEFORE committing yourself.
For impartial, friendly, plain speaking advice, please contact one of our expert mortgage advisers today on 01271 346123.