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Capped Rate Mortgages Explained

Many of us may well be aware of the principles behind fixed rate and variable rate mortgages. Capped rates are a somewhat less understood concept, but they needn't be a mystery. Here, we take a look at capped rate mortgages.

Capped Rate Mortgage Definition

A Capped Rate Mortgage combines elements of fixed rate and variable rate mortgages. You will be basically make mortgage repayments based on the variable rate offered by your lender but there will be a 'cap' set. If your lender's variable rate rises above the level of the cap, then the interest rates that your repayments are based on will still only ever rise to the level that the cap is set at.

Tracker Capped Rate Mortgage Options

As has been noted elsewhere in our articles on mortgages, your lender's variable rate won't necessarily directly relate to the Bank of England base rate. In fact, in many circumstances the lender's variable rate will be higher than the base rate.

This has led to many consumers looking for Capped Rates that are more closely related to the base rate. These are often referred to as Tracker Capped Rate Mortgages.

One other important note about capped mortgages is that they may sometimes have what is called a collar. Collared mortgages don't just have an upper capped rate, they also have a lower collared rate, beyond which the rate can never fall.

Are there any disadvantages?

You'll need to be aware that Capped Rate Mortgages will often have penalty fees, making it more difficult (or, at least, more expensive) to switch mortgage products at a later date. Capped rates will often also be higher than would be the case with the alternative fixed rate mortgage.

Mortgage Basics

1. Fixed Rate Mortgages Explained
2. Variable Rate Mortgages Explained
3. Capped Rate Mortgages Explained
4. Self Cert Mortgages
5. How do Mortgage Terms work?