When you remortgage, you’ll get to choose from many different mortgage types and products. Your options will improve variable mortgages, with interest rates that rise and fall to alter your monthly mortgage payments.
Remortgaging with a capped rate can help you to limit your expenses. With a capped rate, your interest rate is flexible, but won’t rise above a certain percentage. A capped rate remortgage offers some financial security.
Remortgaging with a capped rate can help you to limit your expenses. With a capped rate, your interest rate won’t rise above a certain percentage. A capped rate remortgage offers some financial security.
It can be worrying to know that your interest rates can rise and you’d have absolutely no control, so instead, you might choose a capped rate mortgage when it’s time to remortgage your property.
Find out more by reading on for our capped rate remortgage guide.
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With a variable mortgage, several factors will influence how much you pay each month. As well as your monthly payments, your mortgage interest rates will have an impact on your overall debt levels. The higher the interest, the more you’ll pay for your property.
In some cases, there are no limits to how high or low your interest rates can go. If you choose a capped rate product, you’ve got some financial security. A mortgage cap is an upper limit for your interest rate. If interest rates rise, you’ll be safe in the knowledge that yours won’t rise beyond a certain point.
Remortgaging with a capped rate will sound like a great idea. It may seem like the perfect scenario, to have the potential to be charged low interest but with protection against much higher interest rates. The reality isn’t quite as perfect.
Most interest rate caps are set so high that it’s almost impossible to reach them. Only in extreme cases will your mortgage cap kick in. By then, you’ll already be paying a lot of interest on your mortgage. Lenders also typically have higher interest rates as standard for capped products, so you’ll need to be aware that you won’t get a market-leading rate.
In many cases, caps are paired with a collar. A collar is a lower limit, so your interest rates won’t drop indefinitely. In exchange for the financial reassurance that your mortgage cap brings, you’ll often have to agree to a mortgage collar that stops you from taking full advantage of the lowest interest rates.
There are several drawbacks to a capped rate, but for many, the benefits outweigh them. If you’re remortgaging your property, you may be comfortable taking some limited risk, but might not feel ready to face monthly payments that could be completely unlimited.
By choosing a capped rate remortgaging deal, you’ll protect yourself from the highest charges.
You might want to remortgage with a capped rate if you’ve been stung by high interest rates already. Perhaps you’ve been very unlucky with your mortgage term, paying high interest rates since you first purchased your property. In that case, you might choose to remortgage, so you’ve got some future security.
Capped rate remortgaging can also be of interest to people moving from a fixed rate. Fixed rates are very secure, but with no way to take advantage of rate fluctuations. If you’re now in a position to take on a bit more risk, you might want a variable mortgage with the potential for your interest rates to drop.
Of course, having a capped mortgage provides some protection if they go the other way and increase.
Before agreeing to a capped rate remortgage, make sure that you know how long it’s for. You’ll need to commit and could face hefty charges if you choose to break out ahead of schedule. Capped rate mortgages often come with early repayment charges, so you’ll be locked in for the duration of your capped rate mortgage term.
Most mortgages gave a capped rate for between 2-5 years, so you’ll want to be ready to settle down with this product for at least a few years. In rare cases, lenders might offer a lifetime cap for remortgaging.
As well as checking the length of your mortgage term, think carefully about the interest rates. Is the cap set at a completely unrealistic upper level? Will you be paying more for what seems like protection but has an impossibly high ceiling? Is there really any benefit to your chosen capped rate mortgage at all?
If you’re moving to a new capped rate mortgage, you can choose to stick with your existing provider or to shop around for someone new. Different mortgage providers will set different cap limits, so it’s always worth shopping around.
Your existing provider may be able to offer a great value capped mortgage. If they can’t, or if you’ve found somewhere better, you might want to move to save money.
If you’re remortgaging to a new capped rate mortgage, you should be aware of any fees and charges. Ideally, wait until the end of your existing mortgage term, or check that your mortgage doesn’t come with early repayment charges.
When you remortgage, you might release equity, or could make your mortgage payments lower. Remortgaging can also do more harm than good, so don’t rush into any decisions.
A capped rate can be beneficial, but only if the cost of remortgaging doesn’t climb too high. You can seek independent advice if you’re not sure about capped rate remortgaging.
Examples of how capped rate remortgaging can be beneficial.
Mortgage rates can vary significantly. For this example, we’re using a 1% variable rate mortgage with no cap, compared to a 1.33% mortgage with a cap of 1.5%. The amount borrowed is £120,000 over 25 years. For the purposes of this example, the interest rate will climb to 2%.
|Mortgage Rate||Monthly Repayment||Of which is interest (estimated)|
|Variable - 1%||£452||£52|
|Capped variable - 1.33%||£471||£71|
|Capped variable post interest rate increase - 1.5%||£480||£80|
|Variable post interest rate increase - 2%||£509||£109|
Number compiled by Money Savings Advice
By choosing the capped mortgage, you might instantly be paying almost £20 more than you would on the lower-rate variable mortgage. But, should the interest rate rise to 2%, you’ll only pay £9 more per month, compared to the £57 increase on the variable mortgage.
You don’t have to have started on a capped rate to consider this for your next mortgage term. Capped rate remortgages are suited to those with a moderate appetite for risk. You’ll need to be prepared to risk losing money, with the hope that you’ll do better financially.
If you’re remortgaging at the right time, you could benefit from low-interest rates.
A capped rate mortgage offers safety. If interest rates kept rising, you’d be able to rest easy, knowing that they wouldn’t get too high. The best-case scenario is that interest rates are low, and you’ll pay off your mortgage much quicker to own property debt-free.
If you’re choosing to remortgage with a capped rate, spend some time working out the highest interest rate you could afford. You’ll need to find a lender that caps their mortgages at, or below, this level.
Once you’ve remortgaged with a cap, you’re able to cope with whatever fluctuations come your way. You might want to use the maximum payment as a placeholder in your monthly budget. Unless you hit your cap, you’ll be pleasantly surprised with extra cash to save every month!
Capped rate remortgages aren’t for everyone, but may be right for you if you’d like to take a chance on tracking economic fluctuations. Our trusted financial partners can talk you through your options and help you find a way to remortgage.
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 remortgage 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.
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