Capped Rate Mortgages
A Capped Rate Mortgage is a mortgage which gives you an interest rate that is fixed over a set period, the same as with a Fixed Rate mortgage. However, there is a difference between a fixed rate mortgage and a capped rate mortgage.
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With a capped rate mortgage, if, as a result of the Bank of England base rate dropping it means that your capped rate mortgage interest rate drops below the agreed capped rate, your interest rate will reduce too. In a nutshell, this means that your monthly mortgage repayments will be less.
Likewise, if the standard variable rate increases to mirror any Bank of England base rate change, so will your monthly interest charge, but it will not rise over the capped rate, thereby giving you a bit more control over your budget.
Generally, capped rate mortgages are usually fixed for a period of a few years only, reverting to a standard variable rate at the end of the capped period. The average term of a capped rate mortgage is around five years. However, there are several mortgage lenders who will offer a capped rate mortgage that lasts for the entire life of the mortgage loan.
Capped rate mortgages can be advantageous in that if interest rates are likely to rise, a borrower will have financial protection against repayments going over a certain level. This equates to making it easier for a borrower to budget, as they will know the highest amount their mortgage payments could be.
With today’s highly competitive mortgage marketplace meaning that mortgage products are getting more and more sophisticated in order to attract new business, many mortgage providers also offer capped rate mortgages with the added enticement of introductory discount periods. This means you should be saving even more money on your mortgage repayments.
Of course, as with all good things, there are downsides too – after all, the mortgage lenders are running a business! With capped rate mortgages, the rate payable on them is still usually higher than that available on comparable fixed or discounted rate products.
This may also be true if have an introductory discount to your capped rate mortgage too. Choosing a capped rate mortgage will certainly give you control over your budget as you know the very most you will ever need to pay on your monthly repayments, but you should be aware that you probably won’t get the cheapest interest rate on the market.
