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Capped rate mortgage is supposed to offer the best of both variable and fixed rate deals. Capped rate mortgage like a combination of both. You agree to have a limit (a CAP) on the maximum amount of interest you will pay over a particular period of time while allowing it to fall if the variable rate drops.
The rate is guaranteed not to go above a certain level for a set period of time like in the case of a fixed rate. It may even move downwards too. The interest rate will change on the first day of the month following expiry of the capped rate period. Rate will be changed to the then prevailing variable rate.
Capped rate mortgage usually lasts for a few years. Average around five years. But some lenders do provide capped rate mortgage, which lasts for the entire life of the loan.
Further development of Capped rate mortgage is the 'Cap and Collar' mortgage. It’s like a cap limiting maximum pay rate and a collar limiting the minimum pay rate.
Advantages of Capped rate mortgage.
When interest rates are likely to rise, capped rate mortgage offer protection for borrowers against repayments going over a certain level.
Capped rate mortgage make it easier to budget your expenses since you know what is the highest amount of your payments could be.
Disadvantages of Capped rate mortgage.
Main disadvantage of the capped rate mortgages is that the rate will be still higher than other two products. So capped rate mortgage is a conservative choice. You won't get the cheapest rate on the market .
You will have to pay an application fee when arranging your c apped rate mortgage.
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