Capped Rates
If haven't already been offered a capped-rate mortgage, you probably will be soon. Lenders have just recently started to promote them more heavily, alongside fixed rates and discounts, as a good alternative to just plumping for the standard variable rate. The good news is that this means you will have a larger number of reduced mortgage deals to choose from when it comes to choosing the best mortgage for you. However, more choice brings more questions - just which type of loan should you choose?
First of all,you need to understand how the different deals work. Let's start with the basics. The standard variable rate rises and falls in line with general interest rates as they change and, until relatively recently, this was the only rate at which you could r epay your mortgage.
As competition for business grew amongst lenders, they began to seek different ways of attracting new customers. Reducing the cost of your mortgage repayments is an obvious way, and out of this .
were born the various deals you can now choose between fixed rates, discounted rates and cashbacks, as well as capped rates. However, these deals only last for a relatively short period of time and your repayments will eventually revert to the standard variable rate .
A discount mortgage gives a reduction on the interest charged for a set period -for example, 1 per cent off the lender's standard variable rate for two years. The rate you pay remains variable, so it can go up if interest rates in general rise, but it wil l also fall if rates do.
A fixed rate does the opposite, remaining at a set level for a specific period
for example, 5.99 per cent for two years.
If interest rates fall, a fixed rate remains at the same level, although if rates rise above the level of the fix this choice is obviously going to cost you less.
A capped rate is effectively both a fixed rate and a variable rate. An upper interest rate level is set, above which the interest you are charged won't go - for example. 6.4 per cent for two years. Thi s gives you the benefit of avoiding rising interest rates, in the same way that a simple fixed rate does, but means you can also take advantage of falling interest rates and pay a lower rate than the cap.
If the standard variable rate suddenly rose to 10 p er cent, for instance, a person taking out the discount example above would end up paying 9 per cent. Meanwhile the fixed-rater would still be charged 5.99 per cent and the capped-rate mortgage customer 6.4 per cent.
But if rates then dropped to 4 per cent the picture changes completely. The fixed-rate customer would still be paying an expensive 5.99 per cent, the person with a capped-rate mortgage would be paying 4 per cent, and the discounter would be paying just 3 per cent.
The question to ask yourself is which type of mortage is going to offer you the best deal. To know the answer you'll need a reliaHe crystal ball to predict which way interest rates will move. Alas there is no such thing, h owever, so effectively you'll have to take a gamble on whether they'll nse or fall.
In the example above, the fixed-rater lost out when rates fell, while the discounter was the loser when rates rose. You could therefore presume that capped rates offer the least-risk option, but this is a gross oversimplification of the issues involved.
For starters, most fixed rates are set lower than capped rates, while a discount is always going to be lower than a standard variable rate, which is effectively what a capped mortgage becomes when the variable rate dips below the upper hmit of the cap. So in both scenanos a capped-rate mortgage is likely to prove not to be the best choice.
On the other hand, a cap does give you the best of both worlds - protection against rising interest rates and the opportunity to enjoy falling interest rates when they occur. Neither of the other two types of deal can offer you that.
The fact is that lenders have begtin to promote capped-rate mortgages much more vigorously in the last few months and as a result there are much better deals around else where. Or, after the special deal finishes and you revert to your lender's standard variable rate, you might want to take advantage of another capped, fixed or discounted deal elsewhere.