The capped mortgage is basically an adjustable rate mortgage in which the maximum interest rate is set. Any spike of interest rate over the maximum interest rate will not affect the mortgage repayment. The borrower knows the maximum mortgage payment.
When the interest rate takes a dive, the borrower pays a lower monthly mortgage payment or bi-weekly mortgage payment. Using the capped mortgage, the borrower is protected from a spike in interest rate.
This protection on interest rate spike comes with a price. The mortgage lenders will charge a slightly higher interest rate. For example, the current interest rate is 4.5%. The borrower pays 5.0% interest rate.
The main benefit of capped mortgage is peace of mind. The borrower knows exactly how much is the highest mortgage payment. And, the borrower knows that the mortgage payment will not exceed the maximum mortgage payment.
Recently, the mortgage lenders suffered from mortgage meltdown. The interest rate went up high enough that the borrower could not repay the mortgage. There were so many foreclosures. In this instance, the capped mortgage could have been advantageous for the borrower.
The interest rate for capped mortgage is a compromise between the fixed rate and adjustable rate. So, the interest rate will be slightly over the fixed rate.
Annually, the mortgage lenders allow a certain level to pay additional or lump sum amount without paying mortgage penalty. When the borrower pays additional amount or lump sum amount over the certain level to pay off mortgage early, the mortgage lenders charge the mortgage penalty as well.
In most mortgage lenders, the capped mortgage is available mortgage options for buy to let mortgages. The buy to let mortgage is a mortgage in which the borrower purchase the property to rent. The borrower can purchase several property with buy to let mortgages.