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Information on Capped Rate Mortgages
If the advantages of a variable rate mortgage attract
you reduced payments when interest rates fall but
you are worried about the risk of payments going sky-high
when interest rates rise, a capped mortgage could be what
you are looking for.
Capped mortgages offer a "have your cake and eat it" solution
to interest repayment options. They limit (cap) how far
your mortgage interest rate can rise, regardless of what
the Bank of England's interest rate does, but they do
not prevent your payments falling if the interest rate
falls.
How Does It Work?
When you take out your mortgage, your lender provides
you with two interest rates:
• The
interest rate you will pay to start with
The maximum interest rate (capped rate) you can be required
to pay
Your starting interest rate will be based on your lender's
"Standard Variable Rate" at the time, and will normally
change whenever the Bank of England changes their interest
rates. So if rates go down, your rate will go down and
if rates go up, your rate will go up. But only
until it reaches your maximum (capped) rate.
Once your capped rate has been reached, even if interest
rates keep on going up, your interest rate will stay fixed.
This is the one major advantage of capped rates.
Is There A Downside?
Unfortunately there is. As with anything in life, you
pay for the safety and convenience a capped rate gives
you. Quite often, the variable (starting) interest rate
you will pay is not as competitive as it would be on a
straightforward variable or fixed rate mortgage.
This is because the bank are effectively charging you
for the capped rate, which could potentially cost them
money.
There is not a huge choice of capped rate mortgages, but
there can be some good deals, so if you are interested
the best plan is probably to talk to an independent financial
advisor who will know what capped mortgages are available,
and which offer the best value.
