Our Guide to Collared Rate Remortgages

Len Burgess[1]

Len Burgess

Money Savings Advice guide to collared rate remortgages

When you’re remortgaging, a collared rate can restrict the savings you might make. A collared rate is a lower limit that your interest rates won’t go beyond. Usually, a collared rate protects the interests of your mortgage lender.

What Is a Collared Rate Remortgage?

A collared rate is a lower limit for your mortgage interest rates. If you’re on a variable mortgage, your interest rates will rise and fall in line with the economy. A collared rate means you'll always have a minimum amount.

Collared rates often go hand-in-hand with capped rates. These two mortgage rates are often applied together to a variable mortgage. Not all mortgages have collars and caps, but if yours does, then you’ll need to be aware of the limitations that come with mortgage collars.

Most people won’t agree to a mortgage collar unless it brings other benefits, like reduced interest rates through your mortgage term or a cap providing extra security.

Read on to learn more about collars, and when you might choose to remortgage to a collared rate.

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Collared Rate Remortgage Explained

A collared rate is a lower limit for your mortgage interest rates. If you’re on a variable mortgage, your interest rates will rise and fall in line with the economy. In some cases, they might also be changed to fit the lender’s commercial needs.

If left without collars and caps, your interest could drop to any level and could rise without restrictions as well. Collars and caps can be used to put some limits in place.

A mortgage collar sets a lower limit for the interest you’re charged on your mortgage. This means that when the economy is working in your favour, you might not enjoy the full benefit. Your interest rates (and monthly payments) can’t drop below a certain level, so you’ll be limited to how much money you can save

Why Accept a Collared Rate Remortgage Deal?

You might think that it doesn’t make sense to accept a collared rate mortgage, but many people are willing to choose these because of the potential benefits. Usually, collars are coupled with caps, to limit how much your interest rate can rise as well as fall.

A capped interest rate provides financial security, making sure that the interest you’re charged doesn’t go beyond an upper limit. This offers peace of mind, making sure that you’re never paying more than you can actually afford.

Often, capped rate mortgages are a little more expensive than some other types of variable mortgage on the market. This is because lenders recognise that their profit levels are limited. Since lenders can’t keep increasing your interest, they’ll usually set rates a little higher throughout so that they’re getting more money back.

You might look at collared rate remortgaging if you want the benefits of capped rates, but don’t feel completely happy with the higher standard interest rates you’re offered. Adding a collared rate protects the lender so that they might offer lower mortgage rates than with a capped mortgage and no collar.

Benefits and Drawbacks of a Collared Rate Remortgage

A collared rate remortgage deal isn’t beneficial on its own. There’s no benefit to limiting the lowest interest rate you’ll be charged. Collared rate remortgaging is only beneficial when you’re getting something else from the deal. You might accept a collar for your mortgage if it also comes with a cap, or if a lender offers lower rates in exchange for applying a collar.

A collar isn’t a benefit itself, but something you’ll accept for security and better rates across the full length of your mortgage term.

Example of How a Collared Mortgage Works

Imagine you’re looking to borrow £100,000 on your remortgage deal.

The current interest rate you’re being offered on most variable mortgages is around the 1.5% mark. This means a monthly repayment of £400.

If you choose a collared rate, that also has a cap, you may be limited to 1.25%-1.75% whereas a normal variable mortgage is free to move beyond these limits.

So if the interest rate dropped to 1%, your collared rate of 1.25% would mean a fall to £388, as opposed to a drop to the 1% amount of £377.

But if the interest rate rose to 2%, your repayment would only go to £412 instead of the higher £424.

Collared Rate Remortgaging Terms

When you’re remortgaging, you’ll need to decide the length of your new mortgage term. Moving early can lead to expensive early repayment fees, so you’ll want to be happy with your new mortgage for the foreseeable future. Most collared mortgages are offered over terms of 2-5 years in total.

In rare cases, mortgage lenders might offer a lifetime agreement. With this, you’ll keep your mortgage collar until your mortgage has been paid off.

When you’re choosing a remortgaging deal, think about the interest rates you’re charged. Are the savings you’ll make worth accepting a collar, or could you get a better deal without any collar elsewhere?

Since collars are usually paired with caps, you’ll also want to understand capped mortgages. Whilst a capped mortgage offers some security; it’s often the case that mortgage caps are set unrealistically high. A mortgage cap might not actually be useful if your interest rates are unlikely to ever rise as high as the cap.

Deciding to remortgage with a collared rate is a case of balancing the benefits and drawbacks of these mortgage deals. You might find that the benefits aren’t worth it, or that accepting a collar works in your favour and helps you to get the best rates.

Finding the Right Lender for Remortgaging

You can remortgage with your existing lender, or move to a new mortgage provider. If you’re shopping around for a collared rate remortgage, compare rates from several different lenders. Different mortgage lenders will set their collars at different levels for their mortgages, and you’ll ideally want the best mortgage rates with a collar set as low as possible.

If you’re moving before the end of your current mortgage term, factor in your early repayment fees. Early repayment charges are often quite high and may wipe out the benefits of moving elsewhere. Not all mortgages have these fees, though you might also have other costs associated with remortgaging.

Remortgaging can help you make your mortgage payments lower, or release equity from the property you live in. But for all the benefits, there are potential risks, so take time to make a careful decision.

Who Should Choose Collared Rate Remortgaging?

You don’t need to have started on a collared rate mortgage to move over to this deal when you’re remortgaging. You might want to choose a collared rate if you think that it’ll help you save money.

A collared rare is usually a sacrifice you’ll make to get a better rate on your mortgage, or maybe something you’ll agree to have applied alongside an interest rate cap. Mortgage rate collars are for variable mortgages, so you’ll need to be prepared to accept some risk in exchange for some potential mortgage savings.

If you’d rather have an interest rate that’s consistent and predictable, instead look for fixed-rate remortgaging.

Only agree to a collared rate if you’re getting something out of the deal. A collared rate limits your money-saving potential, so should only be chosen if there’s a benefit for you.

Choosing Collared Rate Remortgaging

Collared rates aren’t appealing on their own. Nobody would agree to put a limit on their interest to stop them from getting the best rates. Yet, you might agree to collared rate remortgaging for other financial benefits.

We also have a range of online guides to help you learn more about mortgage types and remortgaging. Read our online articles include our guides to collared rates and capped rate mortgages. Click below to access our mortgage guides.

How Can Money Savings Advice Help You With A 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.

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.

 

Len Burgess[1]

Len Burgess

Len Burgess is a professional financial writer who over the last five years has written hundreds of articles for all financial sectors. Len founded Money Savings Advice with the aim of helping consumers navigate their way around the financial world by providing easy to understand financial information and matching consumers with the best financial advisor based on their personal information.

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