Capped-rate deals are in fashion but will they wear well?

Fashions come and go, even in the mortgage market, and now one is coming back. This spring sees the re-emergence on the catwalk of the capped loan, a deal that moves in line with interest rates but promises not to rise above a certain ceiling.

For the first time since 2002, the Woolwich last week reinstated a capped deal in its mortgage range, while the Coventry building society has also unveiled a new capped rate.

Greater uncertainty among borrowers over the direction of the cost of borrowing lies behind the fresh demand, says Andy Gray, head of mortgages at the Woolwich. "We had all expected cuts in the base rate this year but the housing market has been strong and [rates] haven't fallen as predicted.

"In light of this, homeowners are reluctant to fix [in case rates do go lower], but they also want security of payment should borrowing costs rise."

Capped rates were particularly popular when, between January and December 2001, the Bank of England base rate fell by two percentage points to 4 per cent. In this situation, homeowners wanted the best of both worlds: to reap the benefits of the cuts but also to be able to budget for a maximum monthly repayment if rates rose again.

However, with the cost of borrowing stabilising, cheaper fixed and discounted variable-rate mortgages have since become more popular. As a result, lenders have generally dropped capped deals from their product ranges.

Now, with the outlook more uncertain, they're starting to come back into vogue. But that doesn't mean borrowers should rush to snap one up, warns Ray Boulger at mortgage broker John Charcol, as capped-rate deals rarely give the best value.

"Many are linked to lenders' standard variable rates [SVRs], and these have to fall dramatically for borrowers to pay less than the rate of the cap."

The new three-year Woolwich deal, on offer at 4.89 per cent, is a prime example. For customers to pay less each month, the lender's SVR - 6.59 per cent in the case of the Woolwich - would have to drop below 4.89. And the chance of that happening in the next three years looks remote. First, the Bank of England base rate - currently 4.5 per cent - would probably have to fall by around 1.75 percentage points. Second, lenders aren't obliged to mirror base-rate cuts in their own SVRs. So borrowers could be left without the benefits.

In this case, customers might as well regard the mortgage as a three-year fixed rate. And that could be a decent option as the Woolwich's own three-year fix is priced at 4.99 per cent.

But there are better deals elsewhere: the Portman and Newcastle building societies offer three-year fixes at 4.54 per cent.

"If you're looking for some certainty of payments, a competitive fix is likely to be the best option," says Melanie Bien of broker Savills Private Finance. "And if you're worried rates may fall, you could opt for a shorter fix rather than a longer one."

Not all capped rates are linked to a lender's SVR. Coventry's deal stipulates that you pay 0.75 percentage points above base rate - capped at 4.99 per cent. That's a good offer at the moment as your repayments would otherwise be at 5.25 per cent.

If you have a 25 per cent deposit, Leeds building society offers a three-year cap that tracks base rate plus 0.25 per cent. Its current rate, 4.75 per cent, is also the cap; if the next move by the Bank is downwards, borrowers will see an immediate benefit.

But brokers largely agree that fixes and deeply discounted base-rate trackers offer the best value.

Civil servant Penny Dean, about to complete on a £156,000 two-bed flat in Brighton, dallied with a capped deal but chose Coventry's four-year fix at 4.99 per cent. "The cap came with tie-ins and was priced slightly higher," she explains.

"I've had a capped deal before, though, and would do so again if my circumstances were right."

Arts and Entertainment
tvPoldark, TV review
Arts and Entertainment
Cassetteboy's latest video is called Emperor's New Clothes rap
videoThe political parody genius duo strike again with new video
Arts and Entertainment
Louis Theroux: By Reason of Insanity takes him behind the bars again
tvBy Reason of Insanity, TV review
Lois Pryce... Life Without a Postcode. Lois lives on a boat with her husband.. Registering to vote in the election has prooved to be very difficult without a fixed residential post code. (David Sandison)
newsHow living on a houseboat meant I didn't officially 'exist'
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Retirement Coordinator - Financial Services

    Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

    Recruitment Genius: Annuities / Pensions Administrator

    Negotiable: Recruitment Genius: You will be the first point of contact for all...

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
    How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

    How to make your own Easter egg

    Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
    Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

    Bill Granger's twist on Easter Sunday lunch

    Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
    Joe Marler: 'It's the way I think the game should be played'

    Joe Marler: 'It's the way I think the game should be played'

    The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
    Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

    Cricket World Cup 2015

    Has the success of the tournament spelt the end for Test matches?
    The Last Word: Justin Gatlin knows the price of everything, the value of nothing

    Michael Calvin's Last Word

    Justin Gatlin knows the price of everything, the value of nothing