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Capped Rate Mortgage

A capped rate mortgage is a cross between a fixed rate and a variable rate mortgage. The interest rate will never rise above a certain rate within what is known as the capped rate period. If the usual variable mortgage rate is less than the capped rate then the borrower is charged that variable rate. Such a mortgage is attractive as the borrower can benefit from falling interest rates but will not have to pay more than the capped rate.

Along with the term capped rate the phrase cap and collar mortgages is often encountered. The "collar" is the minimum interest rate, whilst the maximum interest rate payable is known as the "cap". As these mortgages involve the lender having to source funds it is usual for early redemption penalties to be imposed if the mortgage is redeemed within a capped rate period.