Mortgages Uncovered

Many people have heard of a ‘capped rate’ mortgage but not everyone understands exactly what it entails. Basically, with a capped rate mortgage deal, your interest rate is literally ‘capped’ at an agreed upper level so if interest rates rise, your interest rate cannot rise above that point.

For example, if current interest rates are around the 5% mark, and you were to take out a capped rate mortgage deal at 7%, that means you will pay the current rate, i.e. 5%. If the Bank of England increase the interest rates to, say 6%, then that is still below your capped rate so your interest rate will also rise. However, if the BoE raise interest rates to, say 7.5%, that is above your capped rate so you would just pay 7%. When interest rates come back down to below 7% then your interest rate will decrease too.

So, a capped rate mortgage is a good idea if you believe that interest rates will rise in the future because you will benefit from the protection of the cap.

But what about the collar?

The additional part, that most mortgage lenders seem to have now abandoned is the ‘collared rate’. Basically this protects the mortgage lender somewhat. It means that as well as an upper ‘capped’ rate, you also have a lower ‘collared’ rate.

For example, you might have a cap set at 7% and a collar at 4%. So, if interest rates rise above 7%, you are protected and continue paying at 7% until the rates come back down. However, if rates drop below 4%, you are collared at 4% so will continue paying an interest rate of 4% until rates rise again.