What Is a Capped Rate Mortgage?
A capped rate mortgage is a type of variable rate mortgage that includes an upper limit, or cap, on the interest rate you can be charged. Your rate moves up and down like a standard variable rate, but it cannot exceed the cap, no matter how high interest rates rise.
For example, you might take a capped rate mortgage at your lender's SVR minus 0.5%, with a cap of 6%. Your rate would move with the SVR but could never go above 6%, even if the SVR itself rises higher than that.
Capped rate mortgages have become relatively rare in the UK market. They were more popular in the 1990s and early 2000s but have largely been replaced by tracker and fixed rate products. However, a small number of lenders still offer them.
How Does the Cap Work?
The cap acts as a safety net. Below the cap, your rate moves freely with the lender's SVR or another variable benchmark. If the benchmark rate rises above the cap level, your rate stays at the cap until the benchmark falls back below it.
Some capped rate mortgages also include a collar or floor, which sets a minimum rate. This means your rate can't fall below a certain level either, limiting the benefit you receive if interest rates drop very low.
The cap provides a guarantee that your payments will never exceed a specific amount, which can help with budgeting. However, the trade-off is that capped rate mortgages typically come with higher starting rates than equivalent uncapped variable or tracker deals.
Advantages and Disadvantages
The main advantage is the combination of a variable rate's potential to fall with the protection of a maximum rate. You benefit from rate decreases but are shielded from the worst of any increases. This can offer a good balance between flexibility and security.
However, the cap comes at a cost. Capped rate mortgages usually have higher interest rates or larger margins than equivalent uncapped deals. If interest rates never reach the cap level, you'll have paid extra for protection you didn't need.
The limited availability of capped rate products means less competition and fewer choices. You may struggle to find a capped deal that competes with the best fixed or tracker rates on the market. Additionally, if your deal includes a collar, you could miss out on the full benefit of very low interest rates.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.