A capped mortgage ensures that the interest rate does not rise above a predefined threshold, the capped rate. 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.

Disadvantages

• 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.