Updated: 15/09/2024
We have put together 5 Informative Tips for a Capped Rate Mortgage, all of which we hope will cover the areas of interest, that are most important to you in your buying process.
A Capped Rate Mortgage will vary alongside a Standard Variable Rate, by way of being set at a preset cap of what you have to pay each month. This may also be the maximum figure you would have to pay also, ensuring a monthly budget could be made by the borrower.
Should the Standard Variable Rate decrease at all, then the borrower would also see their monthly payments decrease.
If the Standard Variable Rate were to increase and climb above the agreed rate set out in the terms of the Capped Rate Mortgage, the payments would not increase any higher than the agreed capped rate.
Therefore; basically a limit has been set on the actual repayments the borrower would make each month.
What are the advantages of a Capped Rate Mortgage?
The advantage here is a borrower could in fact pay less as the rates are lowered, but will not suffer as rates increase, as their limit has been set or capped at a certain level. The Lender may also accept over-payments of the loan without a charge being added.
What are the disadvantages of a Capped Rate Mortgage?
A Lender may charge a slight premium of say 0.25% above its own Standard Variable Rate for a Capped Rate Mortgage. Also, an arrangement fee is generally charged, plus an early repayment fee for redemption during the loan term will be added.
Who is a Capped Rate Mortgage Suitable for?
A borrower may be worried about an increase in rates and the effect it would have on their finances, – there is also someone who wishes to capitalise on lower payments if the rates decrease.
Informative Capped Rate Mortgage Tips UK
Taking into account the above information, let’s drill down a little more and add some more depth to understanding a Capped Rate Mortgage.
Capped Rate Mortgages are a type of variable rate product, that limits your payments at a specific maximum interest rate for a specified period. They offer a combination of the security that fixed rates offer and the flexibility that standard variable rates allow.
These products can be difficult to find on the high street, but they are available from a number of specialist lenders and Mortgage Brokers who either have the ‘All of the Market’ software (We do) or are specialists in this type of mortgage who know where to look and who to speak to.
Capped Rate Mortgage Tips
1. Look for a Capped Rate with a Minimum Term of Two Years
Capped Rate Mortgages are a great choice for homeowners who want to have the security of knowing their repayments won’t go above a certain amount. This is particularly beneficial if interest rates are likely to rise, as it could help you budget more easily and over a long-term period.
Capped Rate Mortgages work by allowing borrowers to pay an initial interest rate that is fixed, and then the lender adjusts their Standard Variable Rate (SVR) based on the current market rates. The loan company cap limits the amount of increase a borrower can experience, typically between two and five percent.
There are a few disadvantages to capped mortgages, however, including that they can be more expensive than trackers or discounted rates at the outset. It’s also one of the rarer types of mortgage, so you may struggle to find a suitable deal.
2. Check the Interest Rate Cap
Caps limit the amount of interest that can increase on a variable-rate loan product. They can be annual, or they may last the life of the loan.
When shopping around, for a Capped Rate Mortgage, it’s important to check the initial and any planned subsequent adjustment caps, which say how much the interest can increase each time the rate adjusts.
It’s commonly set at two percent or five percent, so a new rate can never be more than those percentage points higher than the initial one.
Another important consideration is the Strike Rate. The Strike Rate sets the maximum level of interest payments that can be made on a cap and is often defined as the higher of a lender’s Secured Overnight Financing Rate (SOFR).
3. Check the Repayments
As with any mortgage, a Capped Rate Mortgage is no different in that you need to do your research to make sure that you get the best product for your budget and your lifestyle (A Mortgage Broker can do this for you for a fee).
Check that your lender offers a range of mortgage products and compare them to find the right one for you.
You’ll also want to consider all of the possible costs and fees before you sign on the dotted line, such as set-up fees and exit fees as mentioned in (1) above. In addition to this, you should also be aware that Capped Rate Mortgages can be more expensive than their fixed or discount counterparts.
A Capped Rate Mortgage could be the best home loan for you and your family, but you have to do your homework before you sign up for one. The only way to know if it’s the right fit for you is to compare the options and get an expert to guide you through the current mortgage maze.
4. Check the Early Repayment Charge
It’s very important and a must that one of the things that could put you off switching or paying off your mortgage early is an early repayment charge (ERC).
This can quite easily cancel out any savings you may have made by remortgaging or overpaying the outstanding loan fee.
ERCs are common with Capped Rate Mortgages and Fixed-Rate Mortgages, for that matter, as well as cash-back deals, though they can also apply to Standard Variable Rate Mortgages and Tracker deals too.
In most cases, an ERC is a percentage of the mortgage balance that you have outstanding. This is normally between 1% and 5% but it can obviously vary.
Are you able to avoid an early repayment charge? – Absolutely, simply by adhering to any deadline agreed upon with your lender. This is often tied into the end of your deal period but may also be longer.
5. Check the Exit Fee
Now, this is very important, if you’re thinking of switching your mortgage deal at any time, make sure to check if you will have to pay an exit fee! This can also be referred to as a discharge fee, repayment administration fee, or even a deeds release fee and this can add up quickly. You need to not only be aware of this but discuss it with your Broker before taking on the deal.
A good Mortgage Broker will certainly insist you are aware of this before they complete the deal with you.
Lenders can also charge an early redemption charge if you switch during the fixed rate period. These charges may cancel out any savings you could have accumulated by switching.
5 Informative Tips for a Capped Rate Mortgage
Capped Rate Mortgages work similarly to a Tracker Mortgage, with your interest rates linked to the Bank of England base rate. However, Capped Rate Mortgages have an upper limit that cannot be exceeded, and this will give you that added peace of mind when rates go up or down – Which invariably they will!
Updated 2024