Capped Rate Mortgages

Find out what type of mortgages are available to you if you are considering a capped rate mortgage

Are you looking for a Standard Variable Rate (SVR) mortgage?

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Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Updated: May 21, 2024

The mortgage market offers many different types of products, with each one potentially affecting how much your monthly repayments will be. As a result, picking the right mortgage is one of the biggest decisions you’ll make before buying a house.

A capped mortgage is one option available, which we explore here in terms of what they are, their benefits and drawbacks, and which lenders offer them. Finally, we outline how a broker can help find the best deal for you.

What is a capped rate mortgage?

These products work similarly to standard variable rate mortgages (SVRs). Your provider sets the interest rate charged, which can go up or down. Your payments can therefore fluctuate according to what interest rate your provider sets that month. However, in comparison to SVRs where your interest rate can keep increasing, with a cap, the rate has an upper limit. It means you will know the maximum rate you can ever be charged.

Like other types of mortgages, a capped rate product will have an agreed period – which is another difference to an SVR. Capped mortgages usually last between 2 and 5 years. At the end of the term, you can move to another mortgage type or to your provider’s standard variable rate.

What is a capped and collared mortgage?

With this type of product, there is not only an upper limit (the cap) on the interest rate charged, there’s also a lower limit (the collar). It means that while you can protect yourself against an ever increasing mortgage payment, your provider can protect itself against interest rates going down by so much that their profits are hit.

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Benefits and drawbacks

There are several advantages to a capped mortgage, but they’re not without their drawbacks either. It’s crucial to consider all pros and cons in relation to your own financial situation to ensure that this is the right product for you. A broker could help you work through other options available so you get the best possible deal.

Benefits

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Known maximum monthly payment - Knowing the highest amount your mortgage payment could ever be helps with budgeting and prevents you from overextending yourself.

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Your payments can go down - A huge positive is that your monthly payment can go down, not just up, so your mortgage could become cheaper at some point through your term. As a result, it could potentially save you money compared to a fixed-rate deal where the rate may be higher.

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Peace of mind - Being able to know in advance that you can afford the maximum possible mortgage payment can give you confidence for your future financial health.

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Protection in uncertain economic times: They mortgages can reduce the risk of interest rates increasing beyond affordability.

Drawbacks

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Higher and increasing rates - One of the biggest downsides to a capped rate mortgage is that often the rates are higher than with fixed or tracker rate products. Plus while there is a limit on what you may have to pay, your interest rate charges can still increase at any point.

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More expensive fees and charges - To compensate for the protection of the cap, you will generally pay higher fees to arrange this sort of mortgage in comparison to another variable rate product. You may also have to pay early repayment charges for overpayments. These fees can be added to the mortgage balance and absorbed over the total term. Be sure to ask your advisor for an illustration that shows what impact this will have on your monthly payments.

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Not needing the cap - Your provider may not ever raise your interest rate to above your maximum limit - meaning you have paid for something you didn’t require.

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How a broker can help you find the best capped rate mortgage deals

Picking the most suitable type of mortgage for you is vitally important. Getting it right means you can save money while also finding a payment structure that works for your situation. Variable rate mortgages aren’t suitable for everyone, but a broker can help work through the decision with you.

If you do decide that a capped mortgage is most appropriate, their help can prove invaluable especially as there are fewer of these products available. With their whole-of-market knowledge and experience, they can help identify the provider who will offer you the best rate in light of your product type and other factors in your application such as deposit amount, credit history and income. Plus, they’ll ensure that the provider they suggest offers you the best terms and conditions. With a capped mortgage, that will mean securing a loan with the lowest cap possible, with the initial rate offered being low too.

Get in touch and we’ll connect you with a broker who specialises in capped rate mortgages today.

Which lenders offer them?

The majority of high street lenders don’t always offer variable rate capped mortgages, but several specialist – less well known – lenders certainly will.

A broker who specialises in these products will know exactly where to look and have access to what deals and rates are currently available. Seeking a specialist’s advice is, therefore, your best bet if you think you want a variable-rate product with the protection of a cap.

What are the typical interest rates?

Currently, the Bank of England base rate is 5.25% (May 2024), with SVRs (upon which capped mortgages are based) generally being between 2% to 5% higher than that. However, the base rate will change depending on the economic environment and, as a result, mortgage interest rates will change too.

Speak to a broker who specialises in capped rate mortgages

Getting the best rate for a mortgage, but also the best type of product, is crucial to ensuring your mortgage remains affordable. However, picking the most suitable provider who offers terms and conditions that work for you is a tough ask on your own – especially if you are looking for the protection of a capped variable rate mortgage.

Working with a broker who specialises in this type of mortgage can help you as their depth of knowledge will be able to pinpoint the right product and lender for your financial situation. They will know what lenders could offer you a capped rate, and will only ever suggest a provider and mortgage for which you are eligible so that you improve your chances of being approved the first time. Plus, their help ultimately makes the entire application process less stressful thanks to their experience.

Our free, no-obligation broker matching service can put you in touch with an expert who can help you identify the best capped mortgage product for you. Call us on 0808 189 2301 or make an enquiry with us today so we can connect you.

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FAQs

Technically, yes. Tracker rate mortgages are another type of variable mortgage. The rate set is usually tied to the Bank of England base rate, (though not always), plus a set percentage detailed in your agreement. If you have a capped tracker, your agreement will state the maximum rate you can ever be charged. However, like other capped mortgage products, the market for these is small, though a broker could help identify any potential providers.

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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 Online Mortgage Advisor of course!

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Pete Mugleston

Mortgage Advisor, MD

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