Advantages and Disadvantages of The Capped Rate Mortgage
The capped rate mortgage is a kind of variable rate mortgage. However unlike the variable ratemortgage it has a ceiling on the highest rate that it will go to. Normally taken out when you think the interest rates could fall however your not certain and so just in case cap the rate at which it will go through a capped rate mortgage.
Suits customers who want to know the maximum amount they will have to pay for their monthly mortgage payments. But also suits customers who think that interest rates could go down within the capped rate term.
Like a the fixed rate option a capped rate mortgage also is set for a number of years. Typically 1 to 5 years is the term that the capped rate will go on for although longer terms can be arranged. Like the fixed rate an arrangement fee is normally payable and early settlement charges for moving lenders early will apply.
| Advantages | Disadvantages |
| No increase in payments if interest rates rise above the capped rate. | There will likely be an arrangement fee payable. |
| Benefits from falling interest rates, subject to a collar in some instances. | There will likely be an early redemption charge during the capped period and sometimes even after. |
| Low deposit and high LTV loan to value acceptable. | Reverts to normal rate after the set term which may come as a shock to some people. |
Who are Capped Rate Mortgages most suitable for ?
- Those who want to know the maximum monthly payment.
- Those who expect that interest rates will drop but are not certain.
- Those who don’t mind early redemption charges during the capped rate period.
When is the best time for a Capped Rate Mortgage ?
- When the direction the interest rates are uncertain.
- When interest rates are low but could possibly go lower.
- When you want to budget your monthly expenditure for the future.
What to watch for ?
- Long early redemption fees.
- Large arrangement fees and long early redemption charges.
- Watch for a collar sometimes lenders will put a collar on he lowest interest rate that the mortgage will drop to.
