Capped Rate Mortgage
What are capped rate mortgages?
Capped rate mortgages offer security to people who are remortgaging or switching to a new deal and they are often taken out by first time buyers, as a capped rate mortgage effectively "caps" your mortgage interest rate at a certain level for a period of time, so the interest never rises beyond a certain percent and can actually fall if bank rates go below that figure.
How does it work?
The mortgage will usually operate on a variable or predetermined tracker basis and is guaranteed not to exceed the capped rate and is usually offered for a fixed period of time up to 5 years. After this most lenders will change you to a standard variable or tracker rate depending on their initial deal. It can be possible to find a capped rate mortgage that can last for the length of the mortgage and although this sounds good some capped rate mortgages also have a lower limit below which the interest on the loan cannot fall.
When would they be offered?
Capped rate mortgages are generally offered as part of a standard mortgage deal so you might find that you could be allowed up to an average of three to four times your salary for a single application and two and a half to three times your salary for a couple. Some lenders may vary the amount you borrow based on your salary or property value, some may lend 100% and some even more. This will obviously depend on the lender you choose and the amount of the deposit you have, you would get a much better rate with a larger deposit but you could have a deposit as little as 5%, also some lenders may offer 100% deals for capped rate mortgages.
How much and what do I need to put in?
The better rate deals would be with higher deposits but you could put down as little as 5%. Some lenders may offer 100% deals for capped rate mortgages, although this is increasingly rare. If you're worried about risk and need some security a great solution is a capped rate mortgage as you can take advantage of any drops in interest rates and if your cap is set at 5% then you know that you will never have to pay higher rates than that for the time your deal lasts. Also if bank rates go lower then 5% during your deal then so will your repayments.
Ideal for first time buyers?
First time buyers find capped rate mortgages allow them some security in finding their feet whilst budgeting for their mortgage repayments with the added bonus if rates drop. Also as capped rate deals often stand in front of normal mortgage products you might be able to negotiate extra deals such as payment holidays, free overpayments and no redemption charges, obviously this will depend on the services your lender offer.