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Capped-rate mortgages are similar to tracker mortgages, in that the interest rate will fluctuate alongside another publicly-available benchmark rates, such as LIBOR or the Bank of England (BoE) base rate. The key difference is that capped-rate mortgages have a maximum rate that cannot be surpassed. This gives homeowners the security associated with a fixed-rate mortgage.
A capped-rate mortgage will typically advertise its interest rate (for example, BoE + 2%) and its capped rate (perhaps 5%). In this case, the buyer can be sure they’ll pay no more than 5% interest during the initial capped-rate period.
Once this introductory period ends, they’ll typically either be switched onto the lender’s standard variable rate or perhaps their existing tracker rate without the cap.
Often, capped-rate mortgages have higher interest rates than the best tracker-rate mortgages. Essentially, homeowners are paying extra for the security that the rate cap provides.
Capped-rate mortgages are similar to fixed-rate and tracker mortgages in that most of the introductory deals last between two and five years.
As with any other type of mortgage, the best rates are available with shorter-term deals.
When applying for a capped-rate mortgage, the lender’s affordability assessment will investigate whether you’d be able to afford your monthly repayments at the capped rate. This will ensure your mortgage remains affordable no matter how high interest rates rise.
Still, it’s best to do some calculations yourself, so you’re aware how high your monthly mortgage repayments could rise. Most lenders have mortgage calculators on their website that will allow you to do this.
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