Mortgagerates.org.uk review of Capped Mortgages

by Mark Johnston

In Mortgagertes.org.uk series of guides to mortgages we look at capped mortgages. Recently we looked at discounted mortgages which are a guaranteed fixed percentage off lenders standard variable rate over a specified length of time. Today it is the turn of the capped mortgage this is a blend of a fixed rate mortgage and a standard variable rate mortgage with a cap on the interest rate of the fixed mortgage.

A capped rate mortgage once quoted as” have your cake and eat it” solution where the interest rate is stopped at a certain level that is agreeable to both parties called a cap on the interest also taking advantage of lower mortgage payments when the interest rate goes down.

Many people due to the financial climate have to make better choices to keep their assets safe and protected. This is the same with their homes some are looking to buy their first home and get their foot on the housing ladder while others are looking to re mortgage their existing home and would like to get a better more secure deal. More people are looking at capped mortgages and due to the state of the economy no one knows whether the bank of England base rate will remain low to keep inflation stable or if it will have to be raised so one of the main things people are trying to do is find themselves a good secure mortgage that they can afford. People are looking at capped mortgages they have the stability and security of a fixed mortgage and the variable rate all wrapped up in a capped plan.

You are asking yourself what is a capped mortgage well what it is? The capped mortgage is a mix of three types of mortgages the fixed rate bringing security and stability, then lenders standard variable rate this deals with the rise and fall of the interest rate which is unpredictable it may be high one month and low the next. When the interest is high no one can predict how high it will go so it my potentially rise fast or steadily over time to a rate which you can no longer meet the payments so to stop this happening a cap (also known as the ceiling) is put on the mortgage rate you are able to afford. This rate is set by the mortgage lender at a pre arranged level that has been calculated you should be able to manage.

On the up side the interest rates may fall and this will reduce your mortgage payment. Some lenders insist on adding a collar to the lower interest rate this means they put a stop on the lower end of the interest rate so it cannot go too low

Advantages

  • Good for budgeting and avoiding large interest payments.
  • A capped upper limit if interest rises.
  • Can benefit from variable rates

Disadvantages

  • There is not a very lot of choice of capped mortgages.
  • Usually less competitive the fixed and variable rate mortgagesA floor or (collar) maybe added which will restrict you benefiting from falls in interest rates.
  • Benefits come at a price.
  • Capped mortgage rates are usually higher than fixed or variable rates.
  • Not as many lenders willing to offer capped rate mortgages.


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