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