Capped Rate Mortgage

Written by Jeremy Horelick
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A capped rate mortgage combines elements of the fixed rate mortgage and the variable rate mortgage. When you sign on for a capped mortgage, you agree to pay a variable rate that cannot exceed a set amount. If, however, the rate falls, your payable rate falls with it. Hence it's akin to having a low ceiling but no floor, which is an attractive buy for many first-time owners.

The catch is that your capped rate mortgage has a limited term for this agreement. After that period, your rate returns to the standard variable rate (SVR), which varies with the base rate set by the Bank of England. Thus, while you may initially receive a nice value, this can quickly be negated by soaring interest rates.

Disadvantages of the Capped Rate Mortgage

Why, you might ask, doesn't everybody opt for a capped rate mortgage if it defines the upper limit of what you may spend but not the lower limit of what you must spend? Well, besides the cap's limited term, there is another major disadvantage. For the security of your cap, you will almost always pay higher interest rates than you would with a fixed rate mortgage. That's just the nature of the trade-off.

Additionally, it's not uncommon to face application fees for your capped rate mortgage, as well as redemption penalties should you pay off your mortgage early or opt out of your mortgage altogether. In spite of these drawbacks, the promise of a low rate offers many borrowers the peace of mind they're seeking. That alone partly explains why so many buyers continue to choose this type of mortgage.


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