However unlike a fixed rate
mortgage there is the added benefit that the rate being
charged on your mortgage can also fall.
The way this works is the lender sets an interest rate
of say for example 5%, if rates rise above 5% then your
mortgage will not exceed that level as the product
carries a cap of 5%. However if rates fall below 5% then
your mortgage should fall with them, this is because the
product is only capped at 5% a cap stops a rise it does
not stop a drop.
Please note the graph below is not accurate and is for
illustrative purposes only.
This can be clearly seen by viewing the diagram above
the cap prohibits the rate rising above the 5% but free
allows the rate to move below the 5%.
This sounds like the best product to go for if you are
choosing a mortgage as it appears to give you the best
of both worlds. That said this is not always the case
you will generally find capped rate mortgages are
very scarce when you do find them they are rarely as
cheap as their fixed rate equivalent. This is because
the lender knows full well they are taking a bit more of
a gamble if the rate does indeed fall below that of the
cap they will get less in interest payments.
The whole product is unlike the fixed rate were the
lender buys the
funds at the fixed rate to protect their profit margin
the lender in the case of the cap can do little to
protect themselves against the falling rate so they are
offering a good deal if rates rise but they could lose
money if rates fall.
It is for this reason if you do find a cap it will
rarely be a very good one or at least as good as a
comparable fixed
rate of the same period.
|
|
|
|
|
