Capped Rate Explained

This is where your home loan within the incentive period of the mortgage will not go higher than a certain capped rate

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even if interest rates rises over and above the pre-determined rate. However if interest rates fall then the rate in a capped deal will also fall so you benefit. The main disadvantage is because you are getting the best of both worlds, protection and financial reward, when UK interest rates rise or fall then you pay a premium rate probably nearer the lender's standard variable rate. You may be able to get a long term capped mortgage or even a rate set for the full term of the loan.

The lenders may potentially regard the cap as a type of insurance. They may calculate what they anticipate the maximum interest rate will be within the deal term say a three years capped then add a risk loading on top to minimise their risk.

Some lenders may provide a capped rate with a discount. This type of mortgage may potentially suit a first time buyer who could not afford the mortgage if rates when up high but wants to pay less also as their income is low compared to their high mortgage.

Beware of early repayment charges during the incentive period and initial setup fees. This may even be extended past the end of the incentive period. At the end of the incentive period the rate would generally revert to the lender's standard variable rate. Once the incentive period is over the lender may offer the borrower further incentivised deals to try to retain the clients business.

Cap and Collar

Is where you have a maximum rate and minimum rate that would be applied to your mortgage for an incentive period. If interest rates rise above the cap you only pay the cap rate but if rates fall below the collar you may pay a higher rate.

You can have a cap on the maximum the rate can rise along with a minimum interest that your mortgage would fall by so if the interest rate fell below the collar your rate would not drop lower than the preset collar rate hence potentially to some extent protection for the borrower from the lender when rates are falling. Your interest rate would therefore move only within the predetermined rates and not to the exact actual UK mortgage interest rate. This would generally mean that the rates would reflect this. Again there may be early repayment charges and other fees within the incentive period.

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