• Up-to-date Information
  • Thorough and Informative Quotes
  • 100% Free of Charge
Free Mortgage Quotes

Capped Rate Mortgage

Many mortgage lenders offer discounted rates during the first few years of a loan to encourage business. A capped rate mortgage may be offered as a promotional incentive for the initial 1 to 5 years of a mortgage. During this time, the interest rate on the mortgage is guaranteed not to rise above a certain level, or cap. Although interest rates may rise or fall, your rates will never exceed this maximum limit. In addition, a capped mortgage may have a collar, or a minimum interest rate.

Capped mortgages may be interest only or repayment loans. With an interest only mortgage, the borrower pays only the interest due on the loan until the end of the contract. At this time, the capital must be repaid, usually from the funds in a savings or endowment account. Interest only mortgages are less common than traditional repayment mortgages, in which the borrower repays a percentage of the capital with interest each month until the entire loan has been repaid.

Advantages of a Capped Mortgage

Borrowers who place a high priority on financial stability may prefer a capped mortgage to a variable interest rate. Interest rates for a capped rate mortgage are typically linked to the Bank of England, or BOE, base rate, which can be adjusted to accommodate the needs of the economy. Over the course of a capped loan, your monthly mortgage repayments may fluctuate. However, you will never pay more in interest than the capped limit for as long as the promotional incentive lasts.

With a capped deal, it may be easier to plan your monthly budget. Because you know that your monthly repayments to your mortgage lender will never exceed a maximum percentage of your loan, you will always be prepared to pay no more than a certain amount. In our fluctuating economy, many borrowers find that a capped rate mortgage gives them a greater sense of financial stability. Rather than worrying about their interest rates becoming exorbitantly high, borrowers can rest assured that their interest will not exceed the cap.

Capped Mortgage Drawbacks

The longer you maintain a capped rate mortgage, the lower your discount will be. A capped rate that lasts for 1 year will probably be significantly lower than a capped rate that lasts for 5 years. Before you agree to a capped rate mortgage, use a free online mortgage calculator to verify that you can afford to pay off your loan at your bank's regular rate.

At the end of the discounted period, your mortgage loan will revert to the lender's usual interest rate. Most residential loans are variable arrangements, in which the interest charged reflects the lender's Standard Variable Rate, or SVR. The SVR is linked to the BOE's guidelines for monetary policy; therefore, it may rise or fall according to national economic trends.

Capped rate mortgages are less common than other discounted loans, such as variable or fixed rate mortgage discounts. Because capped loans are not as widely available, it may be more difficult to find a competitive deal. Capped rate mortgages may have higher rates than discounted variable mortgages or fixed rate loans, because the interest rate is guaranteed not to rise above a maximum limit.

When you take out a loan to buy a home, you will have a variety of discounted interest rates to choose from. The mortgage industry is highly competitive, and a capped rate mortgage is only one of the deals you have to choose from. Compare quotes on variable, fixed or tracker discounts to determine which arrangement best suits your personal preferences and your household cash flow.

  • Application timeframe? *

  • Property description *

  • Property style *

Instant Quotes