Capped mortgages explained

Capped mortgages are a type of mortgage where a cap is placed on the interest rate payable on the balance borrowed.

Capped rate mortgages are often described as a mixture of a variable rate mortgage and a fixed rate mortgage. In a similar manner to fixed rate mortgages, there is a mortgage interest rate cap. The rate will never increase above this pre-agreed point, but as with variable rate mortgages repayments can differ each month.

Many capped mortgages have a minimum rate they can fall to, which is known as the collar. One of the benefits of a capped rate mortgage is that mortgage payments can reduce as interest rates fall. If the lender's standard variable rate falls below the cap, the rate will fall in line. If the lender's variable rate rises above the capped rate the borrowers rate will not rise above the agreed cap.

Mortgage lenders also offer capped mortgages that track the Bank of England base rate, instead of being linked to the lenders standard variable rate. These tracker capped rate mortgages can be beneficial as they guarantee to fall if the Bank of England reduces the base rate.

First Direct mortgages are offering a new capped tracker mortgage. Until 31 December 2014, the interest rate tracks an agreed percentage above the Bank of England base rate. Regardless of base rate increases a borrowers interest rate will not rise beyond an agreed level. At the end of the capped tracker period, the rate switches to First Direct's standard variable rate

Another possibility is an offset capped mortgage. This is an unusual form of capped mortgage and allows borrowers to merge savings and mortgage in one place, meaning less interest is paid overall. Offset capped mortgages are worth considering for borrowers with significant savings.