What are capped mortgages?

A capped rate mortgage offers the flexibility of a variable rate mortgage with the certainty of a fixed upper rate limit. While they seem like a good compromise, there’s only a few available on the market.  

We take a look at how capped mortgages work and whether it’s worth seeking one out.

A capped rate mortgage offers the flexibility of a variable rate mortgage with the certainty of a fixed upper rate limit. While they seem like a good compromise, there’s only a few available on the market.  

We take a look at how capped mortgages work and whether it’s worth seeking one out.

Mark Gordon
From the Mortgages team
5
minute read
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Posted 16 AUGUST 2021

What is a capped mortgage?

A capped rate mortgage is a type of variable rate mortgage. The interest rate can go up or down in line with the lender’s Standard Variable Rate (SVR) or by tracking the Bank of England base rate.  

The big difference between a capped mortgage and other types of variable rate mortgages is that a capped rate mortgage has a fixed upper rate limit, known as a ceiling or ‘cap’. No matter how high interest rates rise, your payments won’t go above that limit.  

You might want to think of a capped mortgage as a compromise between a fixed-rate and variable rate mortgage – you get the security of knowing your repayments won’t go up beyond a certain level, but you can still benefit if rates go down.  

But do capped rate mortgages really offer the best of both worlds?  

As with any financial product, there are pros and cons to consider, and that’s if you can find a deal. Capped mortgages are becoming a bit of a rarity and there’s only a handful around. With the Bank of England base rate at an all-time low, many borrowers are taking advantage of low interest rates on offer and opting for cheaper fixed rate deals instead.

How do capped mortgages work?

Capped mortgages work pretty much in the same way as a standard variable mortgage.  This means your payments can go up or down each month, whenever your lender decides to change their SVR.  
 
Capped rate mortgages can also be tied to the Bank of England base rate, much like a tracker mortgage. If the base rate is low, your monthly repayments will go down. Once the base rate begins to rise, your repayments will go up.  
 
The benefit of a capped rate mortgage is that your payments will only go up to a certain level for the duration of the deal. This means that you’ll know in advance how high your payments could be. It could make it easier to budget as you have the certainty that your repayments won’t go above the capped limit.

For example: 
 
Let’s say you agree to a capped limit of 6%. A few months into your mortgage, your lender increases their SVR to 6.5%. As this is over your cap, your interest payments will stay at 6%. Further down the line, your lender’s SVR goes down to 5.5%. Your interest rate will also go down and your repayments will be cheaper.  
 
Even if it’s capped, make sure you can afford the fixed upper limit. Your home could be repossessed if you don’t keep up repayments on your mortgage.  

How long does a capped rate mortgage last?

Like most mortgage deals, the capped rate only lasts for a limited length of time - usually between two to five years. Once the introductory period is up, you’ll be moved onto your lender’s SVR or you can remortgage to a new deal.  
 
To find out what potential savings could be made by switching to a new deal, use our remortgage calculator.

What are the advantages of a capped mortgage?

  • If interest rates rise, you have the security of knowing your payments won’t go above a certain amount. 
  • If interest rates fall, you can benefit from lower repayments. 
  • It makes budgeting easier as you’ll know in advance the highest amount your repayments could be. 

What are the disadvantages of a capped mortgage? 

  • You’ll pay for the security of a cap – capped mortgage fees can be higher than those for a standard mortgage. 
  • The initial interest rate can be higher than that of a tracker or discounted mortgage. 
  • It will cost you to leave your capped mortgage deal early – Early Repayment Charges can be higher than for other types of mortgage.  
  • Even with a cap, your interest rates can still go up within that limit, which means your payments would increase. 
  • The upper limit may never be reached while you’re on a capped deal – and as there’s a greater choice of cheaper tracker and discount mortgages out there, you might be paying over the odds for a security you may never need. 
  • Less choice – there’s only a handful of capped mortgages on the market, so it might be difficult to find a deal to suit you. 
Top tip 

When comparing mortgage deals always check out what charges and fees you may need to pay. Mortgage set-up fees can be costly, especially for capped deals, so you want to make sure you can afford the initial up-front costs before you go ahead.  

What are the alternatives to a capped rate mortgage?

With interest rates so low at the moment, there’s plenty of mortgage deals to choose from.  

  • Fixed-rate mortgages give you the security of knowing your payments will stay the same for a fixed period. Five-year fixed rate mortgages are among the most popular type of fixed-rate deals around right now. The downside is that you won’t benefit from any fall in interest rates, as your rate is fixed for five years. 
  • Tracker mortgages go up and down in line with the Bank of England base rate. They could save you a lot when interest rates are low, but if the base rate were to increase, so would you mortgage repayments. 
  • Discount mortgages give you a discount off your lender’s Standard Variable Rate for a fixed length of time – usually two to five years. Discounted mortgages can be some of the cheapest. However, the risk is that your payments can go up if your lender decides to increase their SVR, which they can do at any time and for any reason.  

Comparing mortgages

While a capped mortgage can offer a bit more security than a tracker or discount deal, it doesn’t provide the certainty of a fixed-rate mortgage.  
 
Whatever type of mortgage you decide to go with, remember that when the deal period ends you’ll be moved onto the lender’s higher SVR, so it’s a good idea to shop around to see if you can find a better deal.  
 
We can help you compare mortgages quickly and easily. Just give us a few details about the type of mortgage you want, the price of the property you want to buy and the amount of deposit you have. Use our mortgage calculator to help you work out how much you could afford to borrow.  

Frequently asked questions

What does ‘collar’ rate mean?

A collar rate is the opposite of a cap. Some lenders put a ‘floor’ rate on their tracker mortgages. This means that the interest rate and your payments can only go so low. If your mortgage deal has a collar, your rate will never drop below that limit.  
 
It’s a safeguard for lenders in case interest rates collapse. So, if your collar is 2% and the interest rate plummets to 0.1%, you’ll still pay 2%. 

Is a capped mortgage right for me?

If you want the flexibility of a variable rate but still want some of the certainty of a fixed-rate mortgage, then it might be worth looking around for a capped deal.  
 
A capped deal might also work well for you if you’re expecting an increase in income over the next few years. You’ll have the reassurance that you can afford the upper limit, then the option to remortgage to a new deal once your capped period comes to an end.  
 
Capped variable mortgages can be difficult to find, so you might want to seek the help of a specialist mortgage broker.  

Where can I get mortgage advice?

Our partners, London & Country Mortgages Ltd (L&C)** offer fee-free, expert advice to help you find the right mortgage to suit your needs.

**London & Country Mortgages Ltd (L&C) are a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002). 
 
L&C are not part of Compare the Market Limited. Compare the Market receives a % of the commission that our partner London & Country earns. All applications are subject to lending and eligibility criteria. 
 
L&C will not charge you a broker fee should you decide to proceed with a mortgage.

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