by Mark Johnston
Those borrowers who are looking to take advantage of the sustained low Bank of England base rate of 0.5%, but are worried about future raises and want some sort of protection from them should look at capped mortgages.
Recently a leading financial website highlighted that the number of capped mortgages available on the market has increased over the past few years. Both HSBC’s telephone bank, First Direct and Barclays mortgage brand, The Woolwich are currently pushing their capped mortgage range.
Capped rate mortgage sit somewhere between a variable and fixed rate product. They work in the same way as a variable rate mortgage, in which the mortgage rate could increase if the Bank of England base rate went up. The difference between these and a capped rate mortgage is that a capped mortgage has a limit to how high it can go which provides some element of protection.
Historically borrowers have chosen either variable or fixed dependent on what they are looking for in a mortgage. Now capped mortgages seemed to be on the increase it may well be another option for borrowers.
Michelle Slade an expert looking at capped mortgages pointed out that the issue with capped mortgages is that they are “unlikely to ever hit the cap”. With this in mind borrowers would be better off risking a variable or opting for the solid protection of a fixed rate mortgage which would assure a set monthly repayment over a sustained amount of time.
Not matter which mortgage a borrower goes for it they will always be some sort of payoff. Capped mortgages cost around half a percent more than a variable rate mortgage which is ok if borrowers think base rates will go beyond the cap but if they don’t its money down the drain.
Even now industry experts believe that interest rates will stay low well into next year. Chief UK economist at HIS Global Insight, Howard Archer Said: “the weak economic data announced early this week reinforced his belief that the Bank of England will hold off raising interest rates until at least mid-2012”
Another expert Ray Boulger a mortgage broker at John Charcol said: “The question is: will base rate even go up next year? There is at least a 50% chance that it won’t, and there aren’t any capped mortgages on the market at the moment I’d regard as good value.”
The problem with most capped mortgages that are currently on the market today is that they only last a relatively short period of time in which there is little chance of rates hitting the cap. An example of this is the Woolwich five year capped mortgage at 3.2% which is capped at 5.99%. In order for the cap to kick in the Bank of England base rate would have to increase to 3.29% which there is very little chance even that it has remained at 0.5% for the past few years.
Moneyfacts points out that ING Direct is offering a discounted variable-rate deal lasting for two years where you currently pay just 1.9% (a 1.6% discount off its 3.5% standard rate until 30 September 2013). This deal is only available for loans of up to 60% of the property‘s value. Meanwhile, Coventry Building Society has been offering a competitively priced two-year capped tracker deal where you pay 2.49%, with a cap set at 4.39%. Slade says: “Borrowers opting for the variable-rate deal from ING Direct at 1.9% would have to see rates rising by more than 2.49% – an increase that is highly unlikely – during the two-year period for the capped deal to be a better option.”
This illustrates one of the problems with most of the capped-rate deals on the market: they typically only last for two or three years. Boulger believes there is “very little chance” of interest rates rising very much during that period. At the time of writing, the only five-year capped-rate deal on the market is offered by the Woolwich, but this now looks pricey – the current pay rate is 3.2% (base rate plus 2.7%), capped at 5.99% until 31 August 2016.
Boulger reckons borrowers looking for protection from future rate hikes should consider one of the cheap five-year fixed-rate deals that are around. Chelsea Building Society has just launched a five-year fix at 3.39%, though the maximum loan it will offer on that rate is 70%. There is a £1,300 completion fee and £195 booking fee to pay. Meanwhile, Yorkshire Building Society has a five-year fix at 3.49% with a £995 product fee and a maximum loan size of 75%.
If you are think that variable/tracker is the way to go, other competitive deals include ING Direct’s lifetime tracker where you pay Bank of England base rate plus 1.89% (ie 2.39% at the moment) for the term of the mortgage. This deal has a maximum loan-to-value (LTV) of 60% and there is a £945 fee.
The Woolwich is offering a lifetime tracker priced at base rate plus 1.97% (2.47% now) which is available up to 70% LTV and has a £999 fee.
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