Capped Rate Mortgages

Capped rate mortgages can effectively be thought of as a version of variable rate mortgage for those who are more averse to risk. Like the aforementioned mortgage, the interest rate on capped rate mortgages 'tracks' in line with the Bank of England base rate, staying at all times a set level above it. The difference with this type of mortgage is that there is an upper limit set, so if the base rate shoots into the stratosphere there is no need to have a heart attack, as the most the rates of the mortgages will rise to is the pre-agreed limit.

In effect, this mortgage is designed to offer the best of both worlds from variable and fixed rate mortgages, in that when base interest rates drop so to will the cost of the mortgage, but if rates rise then the borrower is safe in the knowledge that the rise cannot go unchecked, and that the worst-case scenario is known to them and they can plan for that.

With things seemingly all positive for capped rate mortgages, the sceptical amongst you may be wondering what the catch is. The simple answer is, like any premium product, you will pay a premium for this type of mortgage. The interest rates will tend to be slightly higher above the Bank's base rate than a comparable variable rate mortgage, so if rates never reach the cap then in real terms the mortgage will be more expensive. However, if rates did rise and they exceeded the cap, then the relative cost of the mortgage would fall dramatically, as those on a true variable rate would be exposed to the full increase in interest rates.

So you can now see why we stated earlier that capped rate mortgages are like variable rates for the cautious. This type of mortgage shields the borrower to a certain degree from interest rate raises, and still allows them to benefit from rate drops, and the price you pay for this protection is a slightly higher interest rate premium.

When looking for a capped rate mortgage, you need to not only pay attention to the standard interest rate premium (the amount above the Bank of England base rate at which the interest will be charged on the mortgage), but also to the level that the cap is set at. Ideally the mortgage with the lowest premium would also have the lowest cap, but unfortunately this isn't usually the case, so you will need to weigh up whether you go for the outright lowest premium, the lowest cap (which can be important if rates do rise sharply) or aim for a balance of the two.

A capped rate mortgage can be a very good option for many borrowers, and if you are looking for a mortgage that does offer a variable rate, but don't want to take on the risk of the Base rates rising and increasing the costs unchecked, then this could very well be the right mortgage type for you.