Pros and Cons of Capped Rate Mortgages

Capped rate mortgages are a type of mortgage wherein the interest rates cannot go above a pre-determined level for a specific period of time. After the capped period expires, the interest rate of the mortgage returns to the lender's original, Standard Variable Rate or SVR.

Capped mortgages, in many ways, are a combination of a variable rate mortgage and a fixed rate mortgage. They can act like fixed rate mortgages in the sense that they will not rise above a specific rate, thus, the cap.

Additionally, a capped mortgage also acts like a variable rate mortgage in such a way that your payments can change on a month-to-month basis in accordance with the Bank of England's base rate.

So what exactly are the pros and cons of capped mortgages? Here are are some of them:

The Pros

*First and foremost, you are having the best of the 2 sides of the coin, being fixed and being variable. If the rates go beyond your cap, then you are protected. If they fall then of course you benefit from it.

*A lot of capped mortgages will not fall below a minimum rate - this is known as the collar.

*You get rest assured knowing that you will benefit from low interest rates and that during the capped period, your rate will not rise above the pre-determined limit.

The Cons

*Of course all deals have their cons as well, one negative aspect of a capped mortgage is that the rates that you pay will be higher than the regular fixed rate mortgage.

*You will no doubt have to pay an arrangement fee and,

*Early redemption penalties are likely to be much more expensive compared to other mortgage types.

The thing that you have to remember with a capped rate is that mortgage companies are regularly analyzing the markets and the economy. More often than not they will not set the cap beneath the maximum of their expected rate of interest.

But rates offers differ between lenders - even on a daily basis. So it won't hurt to always talk to a mortgage consultant so that you can identify the best mortgage deal for your needs.

It is a daunting task to find and figure out the best deals available for your needs, if you ever plan to take a capped rate mortgage, then make sure you consult professional mortgage consultant or mortgage lawyer especially if you are new to these concepts. capped rate mortgages may seem the perfect deal for you, but better to be safe than sorry.


By: Lisa Davies
http://www.findmortgagedeals.co.uk/mortgages-types/capped-rate-mortgages