Capped Rate Mortgages
This is because a capped rate mortgage is one where the interest rate is guaranteed never to go above a particular level, although it is still a variable rate mortgage.
In practice this might mean the lender would say, for instance, the interest rate will never go above 6% on the mortgage. Obviously it depends on the product and the interest rates of the day, but that is the principle.
Of course if interest rates fall below the cap then you shoudl still expect that your rates will go down.
If this sounds too good to be true - you get the positives when the rate falls but are told you will never have to pay interest at above the cap - then you will be expecting the catch. You cynic!
Well the catch is as follows: the rates are usually more expensive than those you would see with a fixed rate or a tracker, and there is also a collar often in place, which means that the rate will not fall below a certain lower threshold, so again if interest rates go down considerably you may not get the full benefit of this (it is the same as the cap but at the bottom end of the interest rate range).
Given this it is worth considering if the peace of mind is really worth the extra cost, and that is really a personal decision. It is also worth noting that some think the cap is, to all intents and purposes, set above where the lender realistically thinks interest rates could go anyway, although that should not necessarily be a hindrance as if the last couple of years have taught us to expect anything it is to expect the unexpected!
In summary if you want to make absolutely sure you can afford your payments then knowing what the payment will be at the cap and seeing if you can afford that should give you some peace of mind, and you do get the positives when the interest rate falls, but just bear in mind that it may be more expensive than other rates and there could be a collar in place too.
More property related articles:
- Mortgage Fees
- Buying in a Village Might be a Good Investment
- Spain and Utility Services
- Reasons to Remortgage
- First Time Buyers
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