Capped rate mortgages have variable interest rates that will not rise above a certain upper limit. The interest rate can rise or fall during the term of the mortgage, however it will not rise above the capped upper limit.
Interest on capped rate mortgages is usually charged at the lender’s Standard Variable Rate (SVR) and any changes to this rate will affect the amount of monthly repayments due.
The lender’s SVR normally rises and falls roughly in line with changes to the Bank of England Base Rate (BoEBR). The base rate is assessed each month by the Bank of England’s Monetary Policy Committee (MPC) and any changes to the rate are reflected in lenders’ SVRs shortly afterwards.
While capped rate mortgages have variable interest rates, unlike other variable rate products, capped rate mortgages offer the borrower some protection against interest rate rises with the “cap”.
The capped rate is an agreed upper limit that the SVR cannot exceed during the term of the mortgage, therefore any rises in the lender’s SVR below the cap will be passed on to the borrower, while any rises above the cap will not.
Conversely, any falls in the lender’s SVR below the cap will be passed on to the borrower, therefore reducing the amount of monthly repayments due. The borrower will therefore be protected against rises in interest rates above a certain point, but will benefit from any falls in interest rates.
Because of this, capped rate mortgages are ideal for borrowers who are expecting interest rates to rise and become popular during times of steadily rising interest rates. By taking out capped rate mortgages during periods of historically low interest rates, borrowers can secure themselves against excessive future increases in interest rates while still benefiting from any reductions in rates.
Capped rate mortgages may also have an associated “collar” below which the borrower’s rate cannot fall. These products are known as cap and collar mortgages. Any reduction in the SVR below the collar will not be passed on to the borrower.
It is important to note that most lenders charge an arrangement fee for their capped rate mortgages and the SVR attached to these products are usually slightly higher than for discounted mortgages.
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