set a maximum limit on the payback rate and ensures that the mortgage interest rate does not rise above a predefined threshold. Should the lender's standard variable rate (SVR) be below the level at which the cap is set, you get to pay that amount. This is a product that puts together one of the most attractive aspects of a fixed rate mortgage, that you know where your mortgage is going to rise to at worst and are guaranteed it not going any higher. It mixes it with a variable rate mortgage, where if base rates go down, your mortgage pay rate will follow it down. The interest rate is usually the same as the lender's standard variable rate, but will not rise above the capped rate.

Capped rate mortgages are also available in conjunction with some discount mortgages.

Advantages

• You can benefit from a fall in the Bank of England's base rate that leads to a subsequent fall in your lender's standard variable rate. At the same time you remove the risk of the interest rate increasing beyond a known level, allowing you to budget more easily.
• Offer protection for borrowers against repayments going over a certain level. Thus, they are seen as being almost as attractive as fixed rate mortgages, although fixed rate mortgages are set a good deal lower than capped rate mortgage will be. It makes it easier to budget for your expenses when you know the highest amount that your payments could be. In addition to this, you can enjoy the benefits of any cuts made to the lender's SVR.

Disadvantages

• The rate payable on them is still usually higher than that available for comparable fixed or discounted rate products. This is even with the existence of discounts in conjunction with the caps. Capped rate mortgages are a conservative choice as you won't get the cheapest rate on the market.
• Early redemption penalties will almost certainly apply, which may also extend beyond the end of the discounted period. This means you will be unable to change your mortgage during the 'early redemption penalty period' without paying a fee, which may be up to the value of six months mortgage repayments. So, you may be trapped in an uncompetitive rate once the interest rate reverts to the lender's standard variable rate.
• You will normally have to pay an application fee when arranging your capped mortgage.