Five Questions About: Capped mortgages

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The Independent Online

What's a capped mortgage?

Capped, or capped-rate mortgages, offer a halfway house for borrowers uncertain whether to opt for a tracker or fixed-rate deal. While capped rates are variable, there is a cap in place above which the mortgage rate will not increase. This means that although the headline rate may change during the term, you know your repayments will not rise above a certain level.

What are the advantages?

The security offered by the cap makes deals of this kind an attractive option for borrowers keen to protect themselves against Bank of England base rate rises, while benefiting from lower rates than those offered by fixed-rate deals.

The disadvantages?

The headline interest rates on capped mortgages are typically higher than equivalent tracker deals. This is the premium you pay for the protection offered by the cap. So if the base rate stays at the same level for several more months, the chances are you would be better off with a conventional tracker mortgage. The level at which the cap comes into force is also often higher than the rate you would pay with a fixed-rate deal, meaning you could lose out should rates increase significantly.

Which lenders offer capped mortgages?

The number of capped mortgages on the market has shot up in the past two years. Mortgage lenders that have jumped on the bandwagon include Coventry Building Society, first direct and Barclays' mortgage arm, Woolwich.

Where are the best deals?

The best capped mortgage rates are reserved for borrowers with larger deposits. Over three years, for example, one of the best capped-rate deals is from first direct, with a current representative APR of 2.68 per cent (variable) and a cap of 3.98 per cent (fixed). However, this deal, which has a £999 fee, is only available to those with a deposit of at least 35 per cent.

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