Capped rate mortgages are the rarest types of mortgage you will find available when you are looking for a mortgage. At any one time there are only a handful of these available. They are very similar in nature to a standard variable rate mortgage, but there is one significant difference, and that is that there is a cap on the interest rate that you will pay. In practical terms this means that once your payments reach a cap, even if the interest rate soars above this, your payments will not go any higher. However you also retain the benefits when interest rates drop as you payments will also drop.

The capped rate is offered for a limited amount of time, in very much the same way as a fixed rate mortgage is. These periods range from around 2 years up to a maximum of 5 years. Once this capped rate period ends, as with a fixed rate mortgage, your mortgage will return to a standard variable rate mortgage. Capped rate mortgages and fixed rate mortgages are the only types of mortgages available that will give you the security of knowing that your payments will not go above a certain level for the duration of the tie-in period. Unlike a fixed rate though, you also get the benefits of interest rate drops.

While this can seem like an attractive option, you should not automatically assume that this will provide you with the most cost effective mortgage as capped rate mortgages will generally offer a higher variable rate than a good tracker mortgage. If you do opt for a capped rate mortgage, check out all of the details carefully about the length of time your capped rate will be in place and any restrictions or fees that will be incurred if you decide to move your mortgage or if you wish to pay it off. There may also be restrictions on the amount of mortgage overpayments you can make that can be more limited than for a standard tracker or fixed rate mortgage.

Even if interest rates are currently low, do make sure that you are able to afford the payments if the interest rate rises above the cap. This is now part of the standard mortgage application process and so is something that you will have to be able to make a decision on well before any interest rate rise. You should also make sure that you are able to manage a flexible mortgage payment and so be able to deal with varying amounts going out from month to month depending on the current interest rate.