Capped rate or capped and collared rate

Interest rates

With this type of mortgage, the interest rate is linked to your lender’s standard variable rate but with a guarantee that it won’t go above a set level (called the ‘cap’) for a set period, but equally won’t go below a set level (‘collar’) for an agreed period of time. It’s possible to have a capped rate without a collar.

Advantages

  • You know the maximum and minimum you’ll pay for a set period of time making budgeting easier.
  • These products are useful if you want the security of knowing that your payments can’t rise above the set level (the cap), but could still benefit if rates fall during the set period.

Disadvantages

  • Even if other rates fall, your interest rate for the set period will not go down below the level of the ‘collar’.
  • If you want to repay the mortgage early, there could be early repayment charges.