Variable Mortgages Can Change Every Month, But With A Capped Rate Mortgage You’ll Have Some Financial Security


Ignatius Uirab

Money Savings Advice capped mortgage or variable mortgage

With a capped rate mortgage, your monthly payment has a maximum ceiling. Even if interest rates are particularly high, there’s a limit to where yours will stop.

A capped rate mortgage allows a buyer to take on the risk with more confidence, though there are some reasons why you might not want to choose this type of mortgage for your property.

What Is a Capped Rate Mortgage?

Capped rate mortgages are variable mortgages that have an upper-interest cap. Though your interest rate might fluctuate, with a capped rate it won’t go above a certain level. Capped rate mortgages provide some financial security.

Read on to learn more in our capped rate mortgage guide.

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Variable Mortgages And Caps

There are several benefits to taking on a variable mortgage. Many people choose these because they provide the chance to benefit from economic changes. There’s a chance your interest rates could rise, but there’s also a chance that they’ll fall. Of course, variable mortgages are unpredictable by nature.

When interest rates fluctuate, how do you know what you’ll pay for your mortgage each month? An inability to budget far in advance is the trade-off for a variable mortgage.

Some people might be concerned about choosing a variable mortgage. Whilst it’s reassuring to know that your mortgage price can change roughly in line with the economy, it’s far from reassuring to know that your monthly payments could continue to rise indefinitely. That’s where a capped rate mortgage comes in.

With a capped rate mortgage, your interest rates have a maximum limit. This is agreed with your mortgage provider in advance. If interest rates keep rising, you’ll have the security of knowing where yours will stop.

With a capped interest rate, you’ll know that even in its most expensive months your mortgage will remain affordable.

Benefits Of Capped Rate Mortgages

Capped rate mortgages make variable mortgages feel safer and more accessible. Now, your mortgage payments have a maximum ceiling and won’t rise beyond what you can afford.

You can cross your fingers for a good run of low-interest rates, whilst knowing you have a safety net that will keep your mortgage payments within budget.

Drawbacks Of Capped Rate Mortgages

Capped rate mortgages aren’t the cheapest overall. Your mortgage lender knows that they could be losing out by capping your interest charges, so they’ll want to get their money back by raising the overall price. Throughout the full length of your capped length mortgage, you’re likely to be charged higher interest rates.

By making your mortgage more expensive overall, lenders are reducing their risk. You could find better mortgage deals, though might have to sacrifice an interest cap in order to get them. Capped mortgages, whilst they have their upper limit, are some of the most expensive.

Many capped mortgages have caps so high that it’s almost impossible to reach them. Though your interest rate is technically capped, there’s a good chance that your monthly payments can still rise to very high levels.

If you agree to a capped rate mortgage, check that you’re happy with the maximum interest rate you’ll pay.

Length Of Capped Rate Mortgages

Most mortgage deals don’t last for the lifetime of the mortgage, and capped rates will be no exception. Though some lenders will offer a lifetime cap, most have capped mortgage terms of between 2-5 years.

Whilst you’re in your capped mortgage term, you can be confident that your mortgage interest won’t rise to unmanageable levels. Make sure you stay aware of how long you’ve got left because at some point your capped rate will end.

Once your capped rate mortgage ends, you’ll have several choices. Rather than taking a passive approach, make an active decision that could save you money or provide you with ongoing security.

Likely, you’ll be moved onto your mortgage provider’s standard variable rate automatically. This is typically another quite expensive mortgage but comes without the benefit of an interest rate cap. Most people don’t want to sit on this mortgage for too long.

You can choose to remortgage, once your capped rate term comes to an end. Many people opt for another capped rate mortgage or look into alternatives like discount rate mortgages or the security of fixed rate.

Leaving A Capped Rate Mortgage Early

Like many other mortgages, your capped rate mortgage is likely to lock you in. Many of these mortgages have high charges for early repayment, or for breaking out of your mortgage before its term comes to an end.

If you later decide that your capped rate mortgage isn’t working for you, getting out of the deal for a chance to remortgage could cost more than the savings you’d make.

A better mortgage elsewhere might not be worthwhile once you’ve paid your exit fees to move.

Mortgages With Caps And Collars

Many mortgages with caps will also have collars, setting a lower limit. With a collar, your interest rate won’t drop below this minimum level. Collars set a limit on the savings you can make if interest rates drop too low levels.

Effectively, with a cap and a collar, you’re bringing your interest rates into a guaranteed range. They won’t rise too high, but they’re also stopped from dropping so low that you’ll enjoy the best mortgage interest rates.

When you choose a capped rate mortgage, be sure to check the small print and see if your mortgage has a collar.

Interest Rate Statistics

According to the Bank of England, interest rates are at the lowest since records began in March 2020. The average interest rate for a five-year fixed-rate mortgage is just 1.66% while a two-year variable mortgage is currently averaging 2.5%.

The variable rates are higher than they have been within the past two years, and so it may make more sense to opt for a fixed rate – but it’s difficult to predict the future, and variable rates could dip over the mortgage term.

Who Is A Capped Rate Mortgage Best For?

Capped mortgages suit borrowers that have some financial flexibility, but don’t pair this with a carefree approach to risk.

With a capped mortgage you’ll have a safety net, knowing the absolute highest interest rate that you’ll end up being charged for your mortgage. With this safety net in place, you can ride the fluctuations of rising and falling interest rates. If things go well, you’ll get a great price. If things go badly, they can’t go too wrong.

If you’re considering a capped rate mortgage, be aware of the higher prices charged. Capped rate mortgages are often more expensive than other types of variable mortgage. You’re paying a higher price overall for the security of interest rate capping.

If you need even more security, you may be more suited to a fixed-rate mortgage without any interest fluctuations. If you have higher levels of spare cash and feel more comfortable taking a risk, you’re likely to get a better price with a discounted rate mortgage.

Capped mortgages are a comfortable middle-ground, designed for people that like to manage risk but want a mortgage rate that rises and falls in line with economic developments.

Finding The Right Capped Rate Mortgage

To find the best-capped rate mortgage, you’ll need to consider where the cap’s limit is set and whether it also has a collar. You’ll also need to think about initial interest rates and the cost of your mortgage in comparison to others on the market.

How Can Money Savings Advice Help You With A Mortgage?

Here at Money Savings Advice, we have partnered with some of the UK’s leading mortgage brokers. They have already helped thousands of people get the best mortgage deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a mortgage unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.


Ignatius Uirab

Ignatius is one of our leading financial specialists. With over eight years of financial experience, he has vast experience and knowledge of the financial sector. When he is not writing about how to make your money go further, he is a true family man.

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