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Capped Rate Mortgages

A capped rate mortgage has a maximum interest rate for a given term. The interest rate you pay cannot go higher than the agreed capped rate; thus you know the maximum amount your monthly repayments could rise to. However, if the basic interest rate falls below the capped rate, repayments will also reduce. Sometimes these capped rate mortgages also have a ‘collar’. This means the lender has set a minimum level below which the rate you pay will not fall.

Before taking out a capped rate mortgage, there are a number of things you need to take into account.

• Minimum and maximum mortgage borrowing
  Some capped rate mortgage providers have minimum and maximum amounts of money that they will lend you for a mortgage.
• Mortgage loan to value This is the ratio between amount of the capped rate mortgage and value of property. So, for example if you want a £90,000 mortgage on a property valued at £100,000 the loan-to-value you require is 90%. Some mortgage lenders have limits on these.
• Mortgage high lending charges
  This is a fee that is used to buy insurance to protect the capped rate mortgage lender if you borrow more than a certain amount. Many capped rate mortgage lenders will lend you up to, say, 90% of the value of a property without this fee. But if you want to borrow more, the lender usually needs you to pay for insurance to ensure that it will get all of its money back if the property has to be sold for less than the amount of the capped rate mortgage you have chosen. It must be noted that the insurance company will take recourse against the homeowner even though the provider is compensated for the shortfall.
• Mortgage rate
  It is worthwhile shopping around to make sure you are getting a good deal for your capped rate mortgage. Rates do vary and this can make a big difference to how much you have to pay each month.
• How much can you borrow
  Most capped rate mortgage lenders base the amount they will lend you on how much you earn. For any mortgage the lender will assess how much they will lend you based on your income and outgoings.
• Mortgage early repayment charges
  If you repay your capped rate mortgage at any time before the end of the mortgage term you may have to pay certain fees or an interest penalty. This penalty often decreases with time. An extended redemption tie-in means that this penalty will continue after the initial term of the mortgage.
• Mortgage portability
  This means the capped rate mortgage can be kept with the same lender when you move house.
• Mortgage overpayments
  This is when monthly repayments to a capped rate mortgage can be increased. This means the mortgage is repaid early, which will save you money on interest.
• Mortgage related insurance
  Lenders insist that the property is insured with a buildings insurance policy, covering against the usual risks. In addition to this you will need contents insurance to cover things such as theft, fire and damage. Another form of insurance is a mortgage payment protection plan that gives income protection against unemployment, sickness and redundancy.
• Life assurance
  It is a good idea for life assurance to be taken out to cover the value of the mortgage, allowing the mortgage to be repaid should you die.
• Legal costs
  Usually a solicitor or licensed conveyancer needs to be appointed to deal with the legal aspects of buying a property. There will be costs involved and these can vary so it is worth getting a few quotes.
• Valuation / surveys
  It is a legal requirement that the capped rate mortgage lender has the property valued to make sure it is an acceptable security. The mortgage lender's surveyor will need to inspect and value the property. The cost, if any, of this valuation depends on which lender you choose and the value of the property.
• Mortgage arrangement fees
  Most capped rate mortgage lenders charge an arrangement or application fee when you take out a mortgage. Some mortgage lenders will let you add the cost of this to the mortgage. The fee depends on the mortgage lender and the mortgage offer.
• Stamp Duty
  This is a government tax based on the property's purchase price and is calculated as follows:
  • Up to £125K = Nil
  • £125,001 - £250K = 1%
  • £250,001K - £500K = 3%
  • £500,001K+ = 4%.