Leanne Macardle

Leanne Macardle

Editor
Published: 29/01/2019

At a glance

  • Interest rate ceiling or cap means the interest you pay won’t go above a certain level – even if your lender increases their standard variable rate above that of your cap.
  • Typically have higher rates than other mortgage products.
  • Only a few to choose from.

Capped rate mortgages are a type of variable rate mortgage, but with one important difference: they have an interest rate ceiling, or cap, beyond which your payments can't rise.

A capped rate is normally only for an introductory period – typically anything from two to five years. They are also the rarest of all mortgage types – most of the time there are only a handful of capped rate products available in the whole market!

How does a capped mortgage work?

Capped mortgages are the only rate type, other than fixed rates, that will give you payment security.

They guarantee that your mortgage payment won't go above a certain level, but because they are a kind of variable rate, they also let you benefit from lower payments when rates go down.

Capped rate mortgages do tend to offer a higher variable rate than the best tracker rates and discounted rates available because you are paying for the security that the interest cap provides. They will usually also make an Early Repayment Charge if you remortgage to another lender or pay off the mortgage in full (although you may be allowed to make overpayments).

Once the introductory capped rate period comes to an end, your mortgage will go onto a lender's Standard Variable Rate or a tracker rate for the remaining term, although you can remortgage to a new deal if you wish.

Pros and cons of capped mortgages

  • You get the security of knowing that your payments won't go above a certain level.
  • Interest rates can still go up on a capped mortgage, albeit only up to a point. You still need to check you can cope with any rise in rates up to your cap. For example, an increase of just 1% could add up to an extra £83 a month to your repayments for a £100,000 mortgage.
  • Capped rates can be more expensive at the outset than the best tracker or discounted rates on offer.
  • You'll have to look hard for a capped rate, as there are rarely ever more than a handful of products available.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

Make sure that you can afford the maximum payment on a capped rate mortgage, as well as having the flexibility in your budget to manage fluctuating mortgage payments.

What next?

Take a look at our best variable rate & tracker mortgages comparison tool to find the best deal for you.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

light bulb in shape of question mark

At a glance

  • Interest rate ceiling or cap means the interest you pay won’t go above a certain level – even if your lender increases their standard variable rate above that of your cap.
  • Typically have higher rates than other mortgage products.
  • Only a few to choose from.

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