Capped Rate Mortgages Explained

What is a capped rate mortgage?

This type of variable rate mortgage works in the same way as the others in that the interest rate can go up and down in line with the rate it’s following, such as the Bank of England base rate or the lender’s standard variable rate (SVR). The difference is that the lender sets an upper limit – a cap – that the interest rate cannot go higher than. This gives you peace of mind that your monthly mortgage payments won’t go higher than that amount, even if the rate that your interest rate follows continues to increase. As such, it’s a good compromise between a variable rate mortgage and one with a fixed rate.

How does a capped rate mortgage work?

The capped rate is usually set for a short term, such as between 2 and 5 years. During this time, your mortgage payments can either reduce if the rate drops or increase if the rate goes up, although not beyond the upper limit. This makes it easy to budget as you know that your payments can never exceed that amount during the capped period. For example, your rate may be capped at 6%. If your interest rate is based on your lender’s SVR and they suddenly increase it to 6.5%, you can rest assured that you won’t pay higher than 6%. On the other hand, if the SVR falls below 6%, you can benefit from paying that lower rate.

Some lenders set a collar rate as well. This is a rate that your interest rate cannot fall below. Therefore, even if the SVR (or base rate, depending on what your interest rate follows) drops below that collar, you still have to pay that amount. This minimises how much you can save when rates are lowered.

At the end of the capped period, your rate automatically switches to the lender’s SVR, which tends to be higher than other variable rates. To ensure that you don’t end up paying the higher SVR, you can either try to find a better deal with your existing lender or remortgage via a new lender.

Speak with our specialist mortgage brokers for guidance on capped rate mortgages

Our mortgage brokers are here to help you decide if a capped rate mortgage is right for you. They can check your circumstances and discuss your needs, giving you expert advice on both capped rate mortgages and the alternatives. Having compared the rates over different term lengths and determined whether a collar has been set, you’ll have a clear idea of how much you can save if interest rates decrease and the maximum you’ll have to pay each month regardless of interest rate increases.

To get started with your capped rate mortgage application, just give us a call on 01322 907 000. This type of mortgage isn’t offered by many lenders but our mortgage brokers know which lenders do offer capped-rate deals. Your tailored application will be presented to the one offering the deal that’s most suited to your needs and with the best rate and terms for your circumstances. They’ll oversee the mortgage process from start to finish to ensure that you benefit from a straightforward and stress-free experience. If you’re unable to contact us by telephone, send an email to us at info@trinityfinance.co.uk. Alternatively, send an enquiry to us via our contact form. One of our specialist brokers will reply to you as quickly as possible with further details on capped rate mortgages.

Advantages of a capped rate mortgage

A capped rate mortgage offers the following advantages:

• When interest rates go down, you benefit from lower monthly payments.
• When interest rates rise, you have the security of knowing that they won’t go above a certain amount. This ensures that your mortgage remains affordable even in times of economic instability.
• You can budget easily for your mortgage payments because you already know the maximum amount that they can go to.

Disadvantages of a capped rate mortgage

There are also disadvantages to having a capped rate mortgage to consider:

• Your interest rate and, therefore, your monthly payments, can still increase up to the capped rate.
• Some lenders set a collar, which minimises the amount you can save if rates decrease.
• This type of mortgage tends to have a higher interest rate than tracker mortgages due to the security offered by the capped rate.
• Your interest rate may never reach the cap, which means that you’re paying more for this security when it may not be needed.
• The fees charged for capped rate mortgages are usually higher than those for other mortgages. This is to compensate the lender for a possible loss of income due to the capped rate.
• An early repayment charge may be applied if you wish to end the deal early or make an overpayment that has not been agreed upon. This charge tends to be higher than for other mortgage types.

Capped rate mortgages are hard to come by as they are not commonly offered by lenders.

Is a capped rate mortgage right for you?

Whether or not this type of mortgage is right for you depends on your circumstances and needs. It offers you protection against paying over a certain level. This gives you peace of mind in times of economic instability. Knowing the maximum amount you could be liable for also enables you to budget for your monthly payments. In this way, a capped rate mortgage is similar to a fixed rate mortgage. If you’re expecting your income to increase in the near future, this option gives you added peace of mind that you can comfortably afford the monthly payments even if they reach the upper limit and can then switch to a better deal at the end of the capped period. 

As a variable rate mortgage, it also offers flexibility in that your payments can decrease if the rate drops. This allows you to save money. Just be aware that some lenders set a collar, below which your interest rate can’t go. In this case, your savings are minimised. However, lenders stipulating both cap and collar rates may offer better interest rates than those with just a cap. This is because they’re reducing their level of risk.

Alternatives to a capped rate mortgage

If you’re undecided as to whether a capped rate mortgage is suitable for your needs, there are some alternatives to consider.

• A tracker mortgage: This type of mortgage tracks the Bank of England base rate and has a set percentage added on top. As a variable rate mortgage, your interest rate and, therefore, your monthly payments can go up as well as down. When rates are low, you can benefit from saving money but when rates continue to increase, so do your payments.
• A discount mortgage: This gives you a discount by way of an interest rate that’s set at a percentage below the lender’s SVR. When the rate is low, this can be a cheap option. However, you need to be aware that the lender can change their SVR at any time and by any amount. If the SVR increases, your monthly payments could become expensive.
• A fixed rate mortgage: Your interest rate is fixed for a set period, giving you security that it won‘t increase during that time. As your monthly payments stay the same, it makes it easier to budget. However, you won’t benefit from any savings if interest rates start to drop.

Combine flexibility and security with a capped rate mortgage

When you’re looking for a flexible mortgage option that combines security with the possibility of making savings, a capped rate mortgage is worth considering. It can be challenging to find one as they’re not commonly offered by lenders but that’s where we come in. At Trinity Finance, we have an unrestricted range of first and second charge lenders. This means that we can approach the lenders offering capped rate mortgages to compare the rates and terms. With access to broker-only deals, we’ll find the best capped-rate deal to meet your needs.

To discuss capped rate mortgages further or get started with your application, give our mortgage brokers a call on 01322 907 000. Based throughout Kent, London and Edinburgh, they can also advise you on the alternatives available and provide you with comparisons. That way, you can make an informed decision about your mortgage choice. If it’s out of office hours, just send us an email at info@trinityfinance.co.uk or an enquiry via our contact form. One of our mortgage consultants will reply to you as quickly as possible with more information.