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Capped Rate Mortgages

A guide to capped rate mortgages

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 20, 2021

When you’re buying a home of your own, deciding on the right mortgage is just one of the many important things you must do. When you’re considering which mortgage is right for you, a capped rate mortgage is one that you may come across.

It can be a good option for some, but one thing we know from the many enquiries we get about capped interest rate mortgages is that not everyone understands exactly what they are or why they can be a good option.

To help you find out more about what a capped rate mortgage is, how they work and what the benefits of them are, we have written this guide.

What is a capped rate mortgage?

A capped rate mortgage is a type of variable rate mortgage, but the rate can only go up to a certain rate. If you were to agree a capped rate mortgage, the rate would be similar to your lender’s standard variable rate (SVR) and it would rise in-line when the Bank of England’s rate rises and your lender’s SVR rate increases.

Capped rate mortgages explained

The big difference between a capped rate mortgage and an SVR, is that while a capped mortgage interest rate does rise, it can only rise so far. What this means is that even though your mortgage payments can increase, there is a limit to how far they can rise.

If you’re looking for the right mortgage and think a capped rate might be right for you but want to find out more about them, speaking with an experienced mortgage advisor can help. Contact Online Mortgage Advisor and we’ll connect you with one of the experienced and reliable advisors we work with, to help you make the right decision for your needs.

How does a capped rate mortgage work?

Capped rate mortgages work in a similar way to other SVR mortgage products. The initial mortgage interest rate is based on the official Bank of England’s base rate. Also like an SVR, if the UK’s central bank reduces interest rates, the SVR and capped mortgage rates will also be cut.

Similarly, if the Bank of England raises its rate, a lender will also increase its SVR and capped mortgage rates. But, while in theory, an SVR mortgage can rise for as long as the Bank of England raises its rates, with a capped rate mortgage, the interest rate you’re charged can only rise to a certain level, or cap, say 5% or 6%.

Do capped rate mortgages have good rate of interest?

A capped rate mortgage can’t rise beyond a certain level which means you have some certainty that your mortgage repayments won’t go through the roof. However, that doesn’t necessarily mean they have a great rate of interest.

Typically, SVR mortgages are higher than fixed-rate mortgages and tracker mortgages and that’s the same for a capped rate mortgage. Your lender has to make the product work for them too.

So, what does that mean for you? Well, that will the initial rate of your capped rate mortgage will likely be around the same as an SVR, which is higher than other fixed rate deals that are available.

Capped rate mortgages can be the perfect option for some home-buyers. Speaking with a qualified and experienced mortgage broker can be the best way to get reliable advice, compare mortgages and find out if you should be looking for a capped rate mortgage for your home purchase.

What are the benefits of a capped rate mortgage?

There are a number of benefits to agreeing a capped rate mortgage.

They include:

  • You know the maximum monthly repayment you will face if interest rates do rise
  • Your mortgage interest rate can go down as well as up

These are the main benefits of this type of mortgage, although there may be more depending on your specific circumstances.

If you’re interested in discovering if a capped rate mortgage is the right option for you, then why not speak with an experienced and approachable mortgage advisor, like those we work with? Get in touch and we’ll connect you with the right mortgage broker for your home-buying needs.

Are there any downsides to having a capped rate mortgage?

No mortgage is perfect and of course all lenders create mortgages that will work for them financially. With this in mind, the main downside of a capped rate mortgage is that the initial interest rate is not as competitive as some other mortgage deals on offer.

Most lenders SVRs are higher than their fixed rate and tracker mortgages and as the few capped rate mortgages that are available are based on the SVR, this means you could get a cheaper repayment with a different type of mortgage.

Having said that, if a fixed rate or tracker deal isn’t right for you, but you want to find a mortgage that has a cap or a maximum repayment level, then a capped rate mortgage could still be the best option for your particular circumstances.

How do I compare capped rate mortgage deals?

To ensure you end up with the best deal that you qualify for, it’s important to carry out a capped rate mortgage comparison across the entire market. Approaching only one lender could mean missing out on better rates elsewhere.

Making enquiries with multiple lenders could mean unwanted marks on your credit report, and online rates tables aren’t as useful as you might think, since they often give prominent placement to sponsored products and aren’t tailored to your profile.

The solution is simple: make an enquiry and have one of the whole-of-market brokers we work with carry out a capped rate mortgage comparison on your behalf. Through them, you will have access to all of the best deals you qualify for and will be paired with the right lender first time!

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Get capped rate mortgage advice from an expert broker

If you’re interested in finding out more about a capped rate mortgage, getting capped rate mortgage comparisons, finding out if there are any good deals available or even advice on the meaning of capped rate mortgages or if they’re the right product for you, then make an enquiry.

Then you can just sit back and relax while we do the hard work and get in touch with the experienced mortgage advisors we work with. We’ll then connect you with the right mortgage advisor for your needs, who will ensure you get the right advice. You can have everything explained to you to help you decide whether there’s a capped rate mortgage or a different mortgage borrowing option.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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