Capped Rate Mortgages

Anyone who remembers the fantastically high interest rates of the 1980s or the stock market crash of the 1990s will tend to be leery about interest rates, especially the rates on the largest loan most people will ever take out. Capped rate mortgages are a great way to insure that you will never be hit by a high mortgage interest rate if the economy should collapse. With a capped rate mortgage, the interest rate never climbs beyond a set limit (the “cap”). This means that for however long your mortgage term lasts you will never pay a higher interest rate than the cap.

The advantage to this type of mortgage is clear. If mortgage rates go up past the capped rate, you will save a tremendous amount of money on interest charges. The other chief feature of most capped rate mortgages is that if interest rates go down, you will pay a lower than the capped rate. Essentially, a capped rate mortgage is like a variable rate mortgage, in that its rate is calculated at a certain percentage above the Bank of England Base Rate or the lender’s standard rate. The only difference is that if interest rates rise, you will not have to pay more than the capped rate for the duration of your mortgage term.

A capped rate mortgage is a good compromise between a tracker mortgage and a fixed rate mortgage, particularly if you have a low risk tolerance for interest rate changes. A capped rate mortgage offers some money saving opportunities should interest rates remain low, while at the same time ensuring that you never have to pay more than the capped rate.

The downside to choosing a capped rate mortgage is that interest rates for these products are generally higher than the fixed or variable rates offered by lenders. While you may be able to lock in for five years at 6.5%, for example, your capped rate may be 7%. This will not make any difference if rates remain low and you are paying less than 6.5%, but if rates go up you would have been better off with the fixed rate mortgage. At the same time, if rates stay low for the entire term of your mortgage you will have been paying a higher rate against the possibility that rates may go up when you could have saved money on a variable rate mortgage.

Your choice of mortgage products is always just that - a choice. You have to choose the product that best suits your tolerance as well as your assessment of what rates are going to do during your mortgage term. If you want the added security of knowing your rate will never skyrocket, but still want to capitalize on low rates, then a capped rate mortgage may be right for you.