Capped rate mortgages are actually a type of variable rate mortgage, but with an important difference: they have an interest rate ceiling, or cap, beyond which your payments can’t rise.
A capped rate is normally only for an introductory period, which can typically be anything from two to five years. They are also the rarest of all types of mortgage – most of the time there are only a handful of capped rate products available in the whole market!
How does a capped mortgage work?
Capped mortgages are the only rate type, other than fixed rates, that will give you payment security.
They guarantee that your mortgage payment won’t go above a certain level, but because they are a kind of variable rate, they also let you benefit from lower payments when rates go down.
Capped rate mortgages do tend to offer a higher variable rate than the best tracker rates and discounted rates available, because you are paying for the security that the interest cap provides. They will usually also make an Early Repayment Charge if you remortgage to another lender, or pay off the mortgage in full (although you may be allowed to make overpayments).
Once the introductory capped rate period comes to an end, your mortgage will go onto a lender’s Standard Variable Rate or a tracker rate for the remaining term, although you can remortgage to a new deal if you wish.
You will need to make sure you can comfortably afford the maximum payment on a capped rate mortgage, as well as having the flexibility in your budget to manage fluctuating mortgage payments.
Capped mortgages: advantages and disadvantages
- Advantage: When interest rates are low, your payments will be lower
- Advantage: You get the security of knowing that your payments won’t go above a certain level
- Disadvantage: Interest rates can still go up on a capped mortgage, albeit only up to a point. An increase of just 1% could add up to an extra £83 a month to your repayments for a £100,000 mortgage
- Disadvantage: Capped rates can be more expensive at the outset than the best tracker or discounted rates on offer
- Disadvantage: You’ll have to look hard for a capped rate, as there are rarely ever more than a handful of products available