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The cap doesn’t always fit!

The cap doesn’t always fit!

Category: Mortgages

Updated: 25/07/2011
First Published: 25/07/2011

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Borrowers currently opting for a capped rate mortgage have been warned they might never reach the cap.

With borrowers increasingly nervous about when rates might start to rise, demand for the mortgages, which have a ceiling that the mortgage rate will not increase above, has increased three-fold since November 2009, according to Moneyfacts.co.uk.

In response to the growing demand, the number of capped mortgage deals available on the market has increased from one two years ago to 39 at present.

Lenders such as Coventry Building Society, first direct, The Mortgage Works and Woolwich from Barclays are currently offering capped mortgages.

But to pay for the security of the cap, mortgage rates on the deals are typically around 0.50 basis points higher than the equivalent variable rate deal.

However, with the lowest variable rate deal on the market at 1.90%, Michelle Slade, spokesperson for Moneyfacts.co.uk, has doubts as to whether a capped deal is currently the best option.

"While capped rate mortgages are a good idea in principle, in the current market borrowers are unlikely to ever hit the cap and would likely be better off opting for a variable rate deal," she explained.

"Recent figures show the UK economy is not recovering as well as the Monetary Policy Committee would like and bank base rate is predicted to remain at its current level until next year, when it is only expected to rise very slowly.

"Borrowers opting for the variable rate deal from ING Direct at 1.90% would have to see rates rising by more than 2.49% - an increase that is highly unlikely - during the two year period for the capped deal to be a better option."

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