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Capped Rate Mortgages

Capped rate mortgages are similar to fixed rate mortgages in that they offer some security in knowing about what your monthly payments will be.

Unlike fixed rate mortgages however, you can also take advantage of lower payments if interest rates fall.

How capped rate mortgages work

Capped rates work by setting a maximum interest rate on your mortgage for a predetermined period of time at the start of the mortgage. This can usually last anywhere from 1 to 5 years.

If interest rates fall lower than this cap, then your interest rate and, consequently, your monthly payments will go down. If, however, rates go up the rate on your mortgage will only rise as far as the cap allows. This means that you can be sure your monthly payments won't go above a certain level for a set amount of time, allowing you to budget on a month to month basis more easily.

What happens when the cap ends

The cap on your interest rate will last for a certain number of years which is pre arranged when you first take out your mortgage. After that time the interest rate will revert to a standard variable rate. This could be higher or lower than the cap so you could see a sudden change in the amount you have to pay each month.

Be aware of the possibility that interest rates can rise substantially and you could be faced with a much higher payment once the cap ends.

Also, take note of any fees when taking out a mortgage. These can be higher on a capped rate mortgage than with a standard variable rate one.

If you think you may move house again soon or if you want to make additional payments on your mortgage, make sure there aren't any penalties for doing so. This can particularly be the case if you want to make extra payments or completely pay off the mortgage during the capped period.