Capped Mortgages

Capped mortgage – less common these days, this type of mortgage is something of a hybrid between a fixed rate and a discounted mortgage. A ceiling or “cap” lasting a given time period (two years is typical) is agreed, so that the interest rate for the mortgage will not rise above a predetermined level during this “capped” period. Like discounted mortgages, they offer flexibility in your repayments – they will be reduced if interest rates fall.

 However, capped mortgages are often more expensive than discounted arrangements – usually too high to be viable these days. But for borrowers who want the security of knowing that their repayments will not rise beyond their means and being able to avoid the risk of paying over the going rate should rates be cut, they offer a distinct advantage.
 
A cap can also be combined with a tracker or discounted rate: tracker mortgages “track” the Bank of England Base Rate. The rate you pay is nailed down at the Base Rate, along with a fixed margin, so the rate you pay rises and falls directly in line with decisions made in Threadneedle Street (strictly speaking, by the Bank of England’s Monetary Policy Committee).
 
So, capped mortgages are guaranteed not to exceed this given interest rate, enabling you better to control your monthly budget. After the agreed capped period, the mortgage returns to a fixed or variable rate.
 
Capped mortgages - the pros and cons:
PROS

-          If interest rates rise, you have the peace of mind that that you will not have to pay beyond a certain amount (the amount of the cap).

-          Should rates fall, you enjoy lower payments.

-          They are easier to budget, as you know how much your monthly repayments will be.

CONS

-          Initially, you may have to pay more than a fixed or discounted mortgage

-          There are often early repayment penalties

-           The capped rate only lasts for a certain period then the mortgage usually returns to the lender’s standard variable rate.

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