The cap fits First Active

As flexible home loans find favour, Clifford German surveys the field

CAPPED mortgages at rates which cannot rise but can fall now seem to be replacing fixed-rate mortgages as the home loan of choice among the cognoscenti as they look for an each-way bet on mortgage rates.

In the last few days the choice has broadened considerably with Royal Bank of Scotland launching a capped rate of 6.99 per cent over the next five years on up to 75 per cent of the property value, and an option to borrow up to 100 per cent of the value at 7.79 per cent.

Rates will fall as soon as standard variable rates drop below the level of the cap.

Redemption penalties are lifted as soon as the capping period ends, and unemployment insurance for four years or free accident, sickness and unemployment cover for three months is thrown in free.

Alliance & Leicester has launched a mortgage capped for four years at a maximum of 7.7 per cent with no penalty for repayment once the capping ends, or a three-year rate of 6.35 per cent with a redemption penalty for the following two years.

Sun Bank is offering a capped rate of 6.75 per cent for three years on up to 60 per cent of the value, rising to 6.99 per cent on up to 85 per cent of the value, but this includes penalties for redemptions within five years.

Meanwhile, Bristol & West's new mortgage package includes a capped rate of 6.45 per cent for four years with a further 12-month lock-in period, and a capped rate of 6.79 per cent for five years with no redemption penalties once the capping ends.

But this week's star prize goes to First Active, the new name of Mortgage Trust, which is owned by First National Building Society and offers a combined mortgage and bank account that predates even Richard Branson's better publicised One Account.

It is launching a two-year capped rate of 6.99 per cent with no mortgage indemnity charges or penalties for redemption even within the capped period. Combined with First Active's current account mortgage, this creates a home loan which is both capped as a precaution against rising monthly repayments and flexible, enabling borrowers to increase repayments at any time and establish a credit base on which they can subsequently draw cash if the need arises.

In effect, savings credited to the account "earn" the same rate as the mortgage costs because they immediately reduce the cost of the mortgage, which is also the attraction at the heart of One Account.

UnlikeMr Branson's product, First Active does not require its borrowers to pay their salary into the account, although they can do so if they wish. It is expected to appeal in particular to the self-employed, those who expect to make a career break and anyone who wants to speed up repayments.