Fixed rate mortgages offer a sense of security in that you are assured that the interest rate you pay will always be in your range of affordability. But what if current mortgage rates go down? Could you be getting a better deal, at least for some of the duration of your mortgage term?
Capped Rate mortgages offer flexibility in mortgage interest payments, whilst customers remain safely within their affordability limits.
Read on to find out more about how Capped Rate Mortgages work.
Capped Rate Mortgages have an interest rate ‘ceiling’ or benchmark. This means that the interest rate charged cannot succeed a certain benchmark percentage, for a fixed period.
They work much in the same way as a standard variable rate mortgage, in the sense that your mortgage interest payments every month will fluctuate in line with your lender’s SVR and the Bank of England’s base interest rate.
Many capped mortgage deals last for two, three or five years. However, it is possible to get a mortgage that is ‘capped for life’ (i.e. the entirety of the mortgage term).
‘Collar’ is another term you may see in relation to capped rate mortgages. This is the agreed minimum rate of interest to pay in a capped mortgage plan. Those who opt for a mortgage with a collar rate may find that mortgage interest rates fall below the margin. If this is the case, you may not benefit from the lower rates. However, lenders who offer mortgages with both a cap and a collar may pass on slightly more competitive rates than those offering caps on just the upper limits. This is because they see collared mortgages as being a slightly lower risk investment.
Capped Rate mortgages are repaid in the same way as many other mortgage types, where a certain amount of your loan’s capital, plus a certain percentage of interest, is charged each month.
A capped mortgage can also be tied to the bank of England base rate, tracking its fluctuations instead of the lender’s standard variable rate. You will be notified within 14 days if your rate is set to change if you choose a tracker mortgage with a capped rate.
It is worth noting that these types of mortgages often come with charges for exiting early or, in some cases, making overpayments. It is for this reason that those seeking a capped mortgage should consider only capping their rate for a short time (e.g. two years) and reconsidering your mortgage options when the period ends.
Sally has a capped rate mortgage at 6%, as she is on a tight budget. Six months into her mortgage, her bank raised their SVR by 0.5%. As this was over Sally’s agreed cap, her rate remained at 6%. Some months later, the lender switched their SVR again, this time they reduced it to 5.5%. This means Sally mortgage interest rate also reduced to 5.5%. She benefitted from the fall in interest rates.
Fixed-Rate Mortgages – These mortgages offer security in that you will always know what you are paying for your mortgage every month. You may be able to find a better deal at a fixed interest rate.
Tracker Mortgages – It may also be possible to find a good tracker mortgage plan, where the interest rates follow the BoE base rate, with a small percentage added on top. This way you can take full advantage of falls in interest rates.
If you are interested in taking out a capped rate mortgage and you would like to see a free quote for your needs, get in touch with an independent mortgage advisor now.
My biggest concern was finding a mortgage with no strings attached. My options were clearly explained to me and I felt confident about the decision. Alice Silverman, Stoke-on-Trent
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATION EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
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