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Capped Mortgages Overview

Apr 6, 2008
Capped rate mortgages have variable interest rates that will not rise above a certain upper limit. The interest rate can rise or fall during the term of the mortgage, however it will not rise above the capped upper limit. This is designed to offer the borrower protection against hefty future interest rate rises.

Interest on capped rate mortgages is usually charged at the lender's Standard Variable Rate (SVR) and any changes to this rate will affect the amount of monthly repayments due. The lender's SVR normally rises and falls roughly in line with changes to the Bank of England Base Rate (BoEBR). The base rate is assessed each month by the Bank of England's Monetary Policy Committee (MPC) and any changes to the rate are reflected in lenders' SVRs shortly afterwards.

It should be noted that SVRs do not always rise and fall exactly in line with the BoEBR as it is at the discretion of the lenders to alter their Standard Variable Rates as they see fit.

While capped rate mortgages have variable interest rates, unlike other variable rate products, capped rate mortgages offer the borrower some protection against interest rate rises with the "cap". The capped rate is an agreed upper limit that the SVR cannot exceed during the term of the mortgage, therefore any rises in the lender's SVR below the cap will be passed on to the borrower, while any rises above the cap will not.

Conversely, any falls in the lender's SVR below the cap will be passed on to the borrower, therefore reducing the amount of monthly repayments due. The borrower will therefore be protected against rises in interest rates above a certain point, but will benefit from any falls in interest rates.

Because of this, capped rate mortgages are ideal for borrowers who are expecting interest rates to rise and become popular during times of steadily rising interest rates. By taking out capped rate mortgages during periods of historically low interest rates, borrowers can secure themselves against excessive future increases in interest rates while still benefiting from any reductions in rates.

Capped rate mortgages may also have an associated "collar" below which the borrower's rate cannot fall. These products are known as cap and collar mortgages. Any reduction in the Standard Variable Rate below the collar will not be passed on to the borrower in a similar fashion to interest rate rises for the cap.

It is important to note that most mortgage lenders charge an arrangement fee for their capped rate mortgages and the SVRs attached to these products are usually slightly higher than for discounted mortgages. This is because the cap constitutes a risk for the mortgage lenders so they charge inflated fees on applications in order to ensure they receive a minimum amount of income on the product.

If you would like more information on capped mortgages contact an independent advisor. An independent mortgage advisor will be able to offer impartial advice on this type of home loan product and help you assess whether or not it is suitable for your personal financial situation.
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