capped rate mortgages

Capped Rate Mortgages

explained

Capped rate mortgages can be viewed as a cross between fixed rate and variable loans. With a normal variable rate loan the you will interest according to your lenders standard variable rate (SVR), which in turn usually roughly follows the Bank of Englands base rate. If base rates decrease, so long as your lender also reduces their SVR you will pay less. If base rate increase your payments may also increase when the lender increase their SLV. If interest rates keep increasing over a period of time your monthly repayments may increase significantly.

Capped mortgages limit this exposure to future increases in interest rates. For example if base rates are currently at 5% and you take out a loan that has a cap of 6%, even if base rates (and your lenders SVR) rise to say 10% you will still only pay 5%.

The capped mortgage is a nice compromise to the other types of mortgages because it allows you to benefit in the future if interest rates fall while at the same time limiting the impact should future interest rates rise significantly. For a risk averse person who is particularly concerned about interest rates rising in the future, the capped rate deals offer a nice alternative incase their gloomy predictions do not come true. With a capped mortgage they will not find themselves locked into a fixed rate deal paying a high interest charge even if base rates have instead fallen.

However there is a good reason why these types of mortgages do not dominate the market. In general the interest rates on capped mortgages are slightly higher than normal variable rate loans, in view of the lower risk you take on. In addition as with fixed rate deals, heavy redemption penalties often apply should you wish to move your mortgage in the future.

As with all mortgages you should look very carefully at all of the features of the mortgages and compare with other types of products on the market. Once you've decided on the type of mortgage for you you should then begin to compare the different deals on offer from all of the lenders in the market. This can be done either by using comparison sites on the internet or by visiting a mortgage broker who will have access to a large number of deals from a number of mortgage providers.