Capped Mortgages
If you like the idea of the discounted rate mortgage, but don't want your payments to vary too much, a capped rate mortgage may be for you.
Your payments are variable and often linked to a base rate, but fixed not to go above a set level (the 'ceiling' or 'cap') during the period of the deal. At the end of the period, you are usually charged the lender's standard variable rate. For example if the mortgage rate was capped at 7% and the rates rose to 8%. Interest payable would still be at 7%. However if the interest rate fell to 6% then the rate payable would be 6%. After the capped rate period the rate will revert back to the standard variable rate.
What does it mean for you?
- You know the maximum you will pay for a set period of time.
- Useful if you want the security of knowing that your payments can't rise above the set level, but still benefit if rates fall
Although capped rate mortgages are still linked to your mortgage lender's SVR (and so will rise and fall with the base rate) their interest rate is "capped" for a given term. So if interest rates rise above your capped level, you will benefit - and if they fall, so will your mortgage rate, so you'll win again! It's kind of like getting the security from a fixed rate mortgage, with the potential savings of a discounted rate mortgage.
However this kind of flexibility comes at a price and capped rate mortgages are usually higher than both fixed and discounted mortgages. However, they can be a good option for those that need to know their outgoings, but would still like to benefit should rates fall.
Early Repayment Charges
Again, like fixed rate mortgages, capped mortgages tend to have early repayment charges - should you try and switch or pay it off within the discounted period, you will be liable for a charge.