Capped Rate

With a capped-rate deal, the rate you pay is semi-fixed in that it is guaranteed not to go above a certain level - the 'cap' - during the period that the capped rate applies. If the usual variable mortgage rate is less than the capped rate, then the borrower is charged that variable rate. Such a mortgage is attractive as the borrower can benefit from falling interest rates but will not have to pay more than the capped rate. With some deals, there is also a lower limit - the 'collar' or 'floor' - which means that the interest-rate you're charged cannot go below a certain level either.

A capped-rate can be more attractive than a fixed-rate mortgage if you have some flexibility in your budget (allowing you to cope with limited rises and falls in interest rates) and you want the certainty of knowing that there is a limit on how much interest rates can go up and down. It is usual for early redemption penalties to be imposed if the mortgage is redeemed within a capped rate period.