What is a capped rate mortgage?

Yesterday we talked about the Yorkshire Building Society issuing a new capped rate mortgage deal. Those undertaking CeMAP training to become a mortgage advisor need to understand every type of mortgage for the exam, including all those available now and those that were available in the past.

A capped rate mortgage is one that offers a variable interest rate such as a tracker or a discounted variable, but the interest rate has a ‘cap’, i.e. an upper level beyond which the interest rate cannot increase.

Over the last decade or so, capped mortgage deals have not been particularly popular with borrowers and thus there have been very few of them. This is predominantly thanks to low interest rates and competitive mortgage deals and so capped rate mortgages seemed unnecessary.

However, the mortgage market is now far less competitive and as interest rates are at an all time low, the only way is up. The capped rate mortgage once again appeals to many who wish to take advantage of low interest rates now but with the protection of a capped mortgage.

As the borrower with the capped rate mortgage knows the maximum interest rate their mortgage can increase to, they know the highest amount their monthly mortgage repayment could be for the duration of the deal so budgeting is easier.



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