Interest rates
Capped Rate Mortgages
As with all variable mortgages, the interest rate on a
capped mortgage follows the lender's SVR up and down. The
difference with this type of mortgage is that the rate is
guaranteed not to go above the level at which it is 'capped'.
This cap will not last the entire life of the mortgage,
but it is common to find rates that are capped for five
years or more.
Advantages
This type of mortgage is particularly popular in times
where interest rates may be likely to rise, since they offer
protection against repayments going above a certain level.
This makes capped rate mortgages almost as attractive as
fixed rate mortgages to those borrowers who are keen to
set their repayment budget for a specific period of time.
While capped rates prevent repayments rising above a certain
level, they still allow you to enjoy the benefits of any
cuts that the lender makes to its SVR. A capped rate mortgage
does not deny you the savings that arise from falling rates.
Furthermore, it is possible to find capped rate mortgages
that also come with an initial discount in addition to the
cap.
Disadvantages
Despite the availability of discounts in conjunction with
a cap on the interest rate, the rate is usually higher than
comparable fixed rate or pure discounted products. So although
they are a safe choice of mortgage, they are a fairly conservative
one, as you will never have the cheapest rate available
on the market. If rates go as high as, or above the level
of your cap, you would have been better with a rate fixed
at a lower level. If rates drop or stay below the cap, a
discounted rate will normally be better value than a capped
rate.
This type of mortgage also often has redemption penalties,
sometimes with an overhang beyond the capped rate period.
Cap and Collar
This is the same as a capped mortgage, but with a lower
limit as well, meaning that your bets are hedged in both
directions. The mortgage rate is therefore guaranteed to
be within a set margin for the duration of the cap and collar
period.
Like a capped rate product, this is a safe and risk-free
type of mortgage. Although the rate may be marginally cheaper
than a capped rate (but still less competitive than an equivalent
fixed or discounted product), you are losing some of the
potential gains if interest rates drop, since the rate you
pay will not go below the collar rate.
