This is an interest repayment variation.
You agree to have a limit – a cap – on the maximum amount of interest you will pay over a particular period of time while allowing it to fall if the variable rate drops.
Good points: You get the best of both worlds. If the variable rate goes higher than your agreed capped rate then you’re only paying up to the agreed capped rate. Wheras if it falls below your capped rate then you pay less as well.
So you benefit from falling interest rates but are protected from rate rises. You know the max you’ll be paying.
Bad points: There’s only a limited number of these deals on the market and they’re not thought to be very competitive because the interest rate you’ll be paying is going to be higher than your average fixed or discounted rate mortgage.
You pay to get the best of both worlds.
Also there’ll probably be an admin charge by the mortgage lender of £95 to £200 – though this may not be much compared to the amount you might have paid if your mortgage wasn’t capped and interest rates went up…
However some mortgage lenders are now offering good deals which may even be cheaper than fixed rates.