The capped rate mortgage is a win win situation for the borrower. It is a variable rate mortgage which has a fixed upper rate limit (the cap) but no lower rate limit.
The borrower knows in advance the highest amount they can pay throughout the deal period but they can benefit from the Standard variable rate (SVR) going down below the capped rate.
If the cap is fixed at 7.5% and the SVR is 9% the customer will only pay 7.5%. However if the SVR drops to 6.75% the borrowers rate will drop to 6.75%.
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 RATE