A capped rate mortgage is a type of variable rate product that includes a ceiling — or cap — on how high the interest rate can go. Your rate can move up and down (usually linked to the lender’s SVR or the base rate), but it will never exceed the cap, no matter how high rates rise in the wider market.
This gives you some of the benefits of both variable and fixed rate mortgages: you can benefit from falling rates, while having a guaranteed maximum payment. However, capped rate mortgages have become relatively uncommon in the UK market. When they are available, the cap is often set quite high, and the starting rate may be higher than comparable tracker or discounted rate products to compensate for the protection the cap provides.
Some capped rate products also include a collar (a minimum rate), meaning your rate cannot fall below a certain level either. This limits your upside if rates drop significantly. Always check both the cap and any collar when comparing these products.
You take a capped rate mortgage at 4.5% with a cap of 6.0%. If your lender’s SVR rises to 8.0%, your rate only goes up to 6.0%. On a £200,000 mortgage, that cap saves you around £230 per month compared to paying the full 8.0%. If the SVR falls to 4.0%, your rate drops to 4.0% (assuming no collar).
Key Points
- Your rate can rise and fall but will never exceed the cap level
- Offers a safety net against sharp rate increases while allowing you to benefit from falls
- Relatively uncommon in the current UK market
- Starting rates may be higher than comparable trackers or discounted deals
- Some products also have a collar (minimum rate), limiting the benefit of rate drops