A capped mortgage is a mortgage with flexible rate and comes with a restriction beyond which the rate paid will not go up. Mortgage plans come with various types of interest rate selections. Capped interest rate is one of them.
A cap means there is a restriction on the rise in the variable rates for a specific period. The mortgage rate applied to your account cannot be higher than this rate. But if the variable rate goes down and is less than the capped rate, you will save money as the lower interest rate will be used for calculation of your monthly repayment. Capped mortgages allow you to restrict your monthly mortgage payments and yet gain from the drop in interest rates.
Capped rate mortgages limit the maximum rate of interest you have to pay on your mortgage for a predetermined initial period. This shields you against the hike in the interest rates to some degree and if they go down, you will gain from the reduction in interest rates. The mortgage is actually a blend of the fixed rate mortgage along with a regular variable rate mortgage, thus letting you benefit from the reducing interest rates.
A capped rate mortgage is an adjustable rate mortgage with a flat upper rate limit. As a result, the borrower knows beforehand the maximum monthly payment that they may have to bear.
One benefit of the capped rate mortgage is that they protect the borrowers against hike in the interest rates, so their payments remain within their expected budgetary range. This makes this type of the mortgage nearly as lucrative a fixed rate mortgage. A capped rate mortgage provides for easier budgeting as you have an idea of the maximum amount you will have to pay.
But keep in mind that this variety of mortgage generally charges redemption penalties if you want to switch mortgage provider.
Capped rate mortgages carry the advantages of fixed rate and variable rate mortgages.
Though they protect you against the hike in monthly payment and thus offer total peace of mind, they are costlier than fixed or discounted rate mortgages.