Capped Rate Mortgages

What could be better than a fixed rate mortgage? You know exactly what your payments are for a set term of years, and if interest rates rise, your mortgage payments don't - they stay exactly the same.

However it's not difficult to spot the flaw, from the borrowers point of view, in the fixed rate mortgage proposition.

If interest rates move downwards, you end up paying more than your now happy counterparts who, have a discounted rate mortgage.

Suffer this problem for 5 years, and I guarantee, you'll be feeling unhappy about all the extra money you're paying out.

What if then, a mortgage could be designed, so that your payments never increased, even if mortgage rates did, yet reduced, if mortgage rates fell.

Well it has been designed, and it's called a Capped Rate Mortgage.

The advantages are obvious, it's a can't lose deal for the borrower - or is it?

The hidden problem of a capped rate mortgage

How can a lender offer mortgage deals to borrowers, that benefits the borrower in all situations ?

They don't, not really, here's what really happens with a capped rate mortgage -

Lets say you have a 5.75% capped rate mortgage over 5 years, the bank base rate is 4.5%, and the lenders standard variable rate is 6.76%. Six months after taking out your mortgage, the Bank of England reduces their base rate to 4.25%, and your lender follows suit reduces their standard variable rate to 6.5%.

You eagerly await your next, REDUCED mortgage payment, but it doesn't happen, your mortgage payment is exactly the same. You phone the lender to point out their error, and here's the explanation you get:

"For your mortgage payments to reduce, our standard variable rate has to reduce to below your capped rate".

So in this example, the lenders standard variable rate has to reduce below 5.75% (a whole 1%) in order for you to benefit.