In today’s world where most people need to take out a mortgage loan in order to purchase a home, it is important to understand the terms of repayment on that mortgage. When taking out a mortgage one of the most important things to discuss with your banker is the interest rate. The higher the interest rate the more money you will pay back to the bank over the duration of the loan.
There are several different types of personal mortgage deals. This guide will cover Cap Rate deals. The term cap rate refers to the maximum rate of interest that will be charged at any point in the future. This means that the rate of interest you pay cannot go over a certain amount. This amount is often referred to as the ceiling, to signify the upper limit. This type of mortgage loan has two main benefits.
The first benefit is that if the variable interest rate should rise you can be guaranteed that your interest rate will not rise above the agreed upon level. This way you will always know what the maximum amount you have to repay would be. For example, suppose you take out a mortgage for £100,000 to be repaid over 15 years with a capped interest rate of 10%. The maximum amount you would have to repay every month would be £1095.61. If the government or the bank increased the interest rate to 12% you could end up paying £1223.53 each month if you didn’t have a capped rate deal. That’s almost £128 more each month!
The second benefit of a capped rate mortgage is that you will benefit from decreases in the variable interest rate. So when interest rates fall, you will benefit by paying less each month. Using the above example once more, let’s suppose that the interest rate has fallen to 8%. Your monthly repayment could possibly decrease to £973.57. That would save you about £122 each month.
To summarize a cap rate mortgage deal allows you to benefit from falling interest rates and also protects you from any future interest rate rises above the cap rate. You can experiment using a Mortgage Calculator to see how changes in the interest rate can drastically affect your repayment amount.
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