Capped & collared mortgages are a variable rate mortgage which has a fixed upper rate limit (the cap) & a fixed lower rate limit (the collar).
The borrower knows in advance the highest & lowest monthly payments he/she may have to make.
The monthly payments may fluctuate but only between the upper and lower limit, thus giving peace of mind. If the Standard Variable Rate (SVR) does drop below the collar rate though the borrower will pay the collar rate. This makes the Cap & Collar loan better for the lender and not so good for the borrower when compared to a straight forward Capped rate mortgage.
As the lender may lose the benefit of interest rises, arrangement fees and redemption penalties often apply.
(Fees and redemption penalties are covered in later pages on this site).
For obvious reasons these are sought after by borrowers but are not offered by all lenders.
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CAPPED & COLLARED