Capped Rate mortgages

However unlike a fixed rate mortgage there is the added benefit that the rate being charged on your mortgage can also fall.

The way this works is the lender sets an interest rate of say for example 5%, if rates rise above 5% then your mortgage will not exceed that level as the product carries a cap of 5%. However if rates fall below 5% then your mortgage should fall with them, this is because the product is only capped at 5% a cap stops a rise it does not stop a drop.

Please note the graph below is not accurate and is for illustrative purposes only.

This can be clearly seen by viewing the diagram above the cap prohibits the rate rising above the 5% but free allows the rate to move below the 5%.

This sounds like the best product to go for if you are choosing a mortgage as it appears to give you the best of both worlds. That said this is not always the case you will generally find capped rate mortgages are very scarce when you do find them they are rarely as cheap as their fixed rate equivalent. This is because the lender knows full well they are taking a bit more of a gamble if the rate does indeed fall below that of the cap they will get less in interest payments.

The whole product is unlike the fixed rate were the lender buys the funds at the fixed rate to protect their profit margin the lender in the case of the cap can do little to protect themselves against the falling rate so they are offering a good deal if rates rise but they could lose money if rates fall.

It is for this reason if you do find a cap it will rarely be a very good one or at least as good as a comparable fixed rate of the same period.

FSA declaration and important text about mortgage advice

FSA declaration and important text about mortgage advice

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