What are capped rates?

A capped rate is similar to a fixed rate. It is guaranteed that between the capped period, usually 2 to 5 years, you will not have to pay interest rates that go above a certain level, with an additional advantage that if your lenders interest rate tips below the capped rate, you will pay theirs! When the capped rate expires you will revert to your lenders rates. You can also get a discounted capped rate which can offers even more benefits.

The advantages of a capped rate.

1. You have stability knowing that your interest rates will not rise above a specified level, so you will always know the maximum sum you are likely to be paying.

2. If your lenders interest rate drops below the rate you currently pay, then you will pay theirs.

The Disadvantages of a capped rate.

1. Capped rates tend to be more expensive than discounted and fixed rates.

2. If you want to get out of the mortgage during a capped rate then you will have to pay an early repayment charge, also known as a redemption penalty, that can cost hundreds, even thousands of pounds.

3. Early repayment charges come and hand in hand with capped rates, but they usually last beyond the capped rate so you are tied into the variable rate for some time after.

4. During some deals when your capped interest rate expires, it is the norm that you switch to your lenders interest rates, which are usually considerably higher and more variable than what you were originally paying, and you will only be able to switch deals if you pay a redemption penalty

5. When you apply to take out a capped rate, the majority will have to pay a fee, often ranging from £140 to £410 (depending on the lender), and many lenders will not pay you back this money if you re-mortgage or don’t complete on your house purchase.

6. The capped rate has a few variations, such as the rare cap and collared rate. This is almost the same as a capped rate but includes a floor, known as a collar, below which the interest rate will not drop, even if general interest rates fall.