A capped mortgage is a variable rate mortgage but has the added feature of not increasing in rate beyond a particular point, the "cap".

Advantages of the Capped Rate Mortgage

• You can take advantage of the interest rate going down and be confident that, even if it starts to go up, it will never increase beyond your agreed "cap".
• A capped rate mortgage allows you the security of knowing the maximum you can be called upon to pay during the capped period, allowing easier budgeting.

Disadvantages of the Capped Rate Mortgage

• Capped rate mortgages are far less common nowadays and, if you find one, it is likely to be more expensive than a more common product.
• There is likely to be a higher arrangement fee for a capped rate mortgage, the lender covering its costs in a set-up fee knowing that it will not be able to increase the interest rate during the capped period.
• The interest rate charged may well be slightly higher for a capped rate mortgage.
• Your lender may place a limit on how low the interest rate is allowed to fall, meaning that you may not get the full benefit of decreases in the standard variable rate - this would then be known as a 'cap and collar' mortgage.
• As with any other mortgage with a fixed benefit period, there will almost certainly be an early repayment charge for the period of the cap.
• There are likely to be early repayment charges for at least the term of the capped rate period.
• Some capped rate mortgage will tie you down for longer than the capped rate period, meaning that you might suffer an early repayment charge even after the end of the capped rate period.
• You should also be aware that you may need to remortgage at the end of the capped rate period, just as with any other fixed period product. If interest rates have risen during your capped rate period then your monthly repayments may increase substantially - this can be a major shock to your budget.