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Tenen Haus
> Mortgages
> Capped Rate Mortgage - UK Guide
 In a nutshell
A capped rate mortgage 'caps' your mortgage interest rates at a certain level for a period of time - so your interest will never rise beyond a certain percent and will actually fall if bank rates go below that figure.
Best Mortgage For
Any mortgage buyer. This product is often taken out by first time buyers and people that are remortgaging or switching to a new deal. Capped rate mortgages suit people who want a deal that offers security if interest rates rise but who can afford to gamble a little to take advantage if rates drop.
Mortgage Type
A capped rate deal is generally offered for a fixed period of time - i.e. up to 5 years. The deal will usually operate on a variable or pre-determined tracker basis but is guaranteed not to exceed the capped rate. After this time, most lenders will switch you to a standard variable or tracker rate depending on their product set and you may want to switch deals again then.
Typical Amount to borrow
Capped rate mortgages are generally offered as part of standard mortgage deals so you will probably find that you'll be allowed up to an average of 3-4 times your salary for a single application and 2.5-3 times your salary for a couple. This will obviously vary from lender to lender with some lenders allowing you some flexibility on what you can borrow based on your salary or property value (i.e. some will lend 100% of your property value and some will lend more).
Deposit
Again standard terms will apply here depending on the lender you choose. You can put down as little as 5% but may get better rate deals with higher deposits. Some lenders will also offer 100% deals for capped rate mortgages.
Advantages
A capped rate mortgage deal can be a great solution if you're worried about risk but also want to take advantage of any drops in interest rates. So, for example, if your cap is set at 5% then you know that you'll never have to pay higher rates than that for the time your deal lasts. And, if bank rates go lower than 5% during your deal period, then so will your repayments. Many first time buyers like this type of deal as it allows them some security to find their feet whilst they are settling into Budgeting for their mortgage. And, they will get an added bonus if rates drop. And, as capped rate deals often stand in front of normal mortgage products, you may well be able to negotiate extra deals such as payment holidays, free overpayments and no redemption charges - this will depend on the services your lender offers in general.
What to look out for
You don't get something for nothing here and lenders have built in safeguards to protect their own interests with capped rates in case bank rates drop significantly. So, they'll often set the cap for rates quite low - making it quite hard for rates to drop enough for you to make any real savings.
You may also have to pay redemption fees if you change your mind about the deal while it is in force or during your 'tie-in' period. Some lenders will also charge you arrangement fees and mortgage indemnity fees (MIGs) if you borrow over a certain percentage of the value of your property. MIG charges vary - some lenders won't charge them and others have different rates (i.e. 90% or 95%) in force.
Alternatives
If you're interested in the advantages of a capped rate deal then it'll be worthwhile also looking at fixed rate deals at the same time.
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