The mortgage that will never charge more than 3.98%

Are capped tracker mortgages really as clever as they seem? Robert Powell takes a look...

Having your cake and eating it too is not easy when it comes to mortgages.

You can fix your rate, guaranteeing your outlay, and then cross your fingers, hoping that rates don’t drop. Or you can plump for a variable, cross every appendage going and pray that the base rate stays low.

However in the shadow of the unstable economic climate, a hybrid style of variable mortgage with a fixed interest limit has been spreading across the market.

But is the capped tracker really as savvy as it seems?

Capped deals

Capped trackers are mortgages that follow the Bank of England base rate for a set term, but only up to a certain level. This protects you from huge base rate rises by guaranteeing a maximum rate of interest on the mortgage. So you'll know that you will never have to pay more than a certain percentage within the set term of the mortgage.

Moneyfacts' figures show that the number of capped deals available has increased from just one to 39 in the last two years. Indeed, many major lenders are now starting to add these hybrid mortgages to their roster.

First Direct currently has two different three-year deals available. Borrowers with a 35% deposit can snap up a 2.18% + base rate mortgage (initial rate of 2.68%) with a cap of 3.98%, while those with a 25% deposit can get hold of a 2.58% + base rate deal (initial rate of 3.08%) capped at 4.38%. Both of these mortgages come with a £999 fee.

Intermediary lender Kensington also has a range of capped trackers on its books. A loan for 60% of a property’s value is currently priced at 2.64% + base rate with a 4.79% cap. And customers with a 20% deposit can get hold of a 3.59% + base rate deal with a cap of 5.74%. These mortgages come with a £999 fee but are only available to second-time buyers.

The only five-year capped tracker currently available is from Barclays’ mortgage arm, Woolwich, who is offering a 2.70% + base rate deal with a 5.99% cap. Additionally, Woolwich has a-three year mortgage also tracking at 2.70% above the base rate but with a lower 4.99% cap. Both of these deals have a maximum loan-to-value of 70% and come with a £999 fee.

Paying a premium

Now, on paper, capped trackers do look like sensible options. The upper limit grants you a figure to budget into your monthly outlay, while the tracker element allows you to take advantage of low variable rates. And as always, if you’ve done all your research, spoken to a broker and decided that such a deal is the best option for you – go for it!

But I’m still not a fan.

For a start, you’re going to have to pay a premium for the safety net of the cap. Just compare the regular three-year variable rates listed below to First Direct’s 75% capped deal...

As you can see the Yorkshire’s market leading three-year variable is 0.79 percentage points lower than First Direct’s capped tracker. If the base rate does keep rising above 2.59% within the three-year term, your interest rate on the Yorkshire deal will keep heading skywards while the First Direct rate will remain fixed at 4.38%.

Yet if the base rate did jump by this much within the two or three years, you could find yourself in trouble if you opted for any shorter term mortgage deal.

What next?

Capped tracker mortgages are designed to protect against rises in the base rate. And to an extent the cap does. However the fixed term does anything but.

Why?

Every capped tracker currently available (bar one) is two or three years in length. So if the base rate rises within this period you will be protected. But what happens after the fixed term has ended?

Well, you either remortgage or stick with your lender's standard variable rate (SVR).

Now, here’s the bad part.

If the base rate rises in that time, fixed rates will be higher, variable rates will be higher and SVRs will be higher. Basically, the mortgage market will be nowhere near as competitive as it currently is. So even if you’ve managed to save a few pounds thanks to the cap, you’ll almost certainly have to shell out more when the term ends.

And that’s not even the worst case scenario.

Say you plump for First Direct’s tracker with a cap of 4.38%. If the base rate increases by two percent or less within the three-year term (a likely turn of events in my opinion), you won’t even need the cap! So not only will you be faced with a ghastly mortgage market at the end of the three-year term, you’ll also have paid a premium for a capped safety net you didn’t need.

Alternatives

Viewed in one light, capped tracker deals are indeed a low-risk mortgage. But taken from a different angle, they’re also a no-win option.

Yes, you’ll be protected if the base rate does rise. But you’ll also be faced with an uncompetitive market to remortgage back into. And if the base rate stays put, you’ll have paid a premium interest rate for nothing.

Of course, there is one 70% five-year capped tracker available from Woolwich. But with an initial rate of 3.20% and a cap of 5.99%, you’re probably better off fixing for five years – especially when rates are this low...

You can find a full breakdown of all the top deals for five year fixed mortgages by reading Lowest five-year fixed mortgage rates ever.

And if you really can’t resist the current tiny variable rates on offer, there are other ways to get hold of a tracker while protecting yourself from base rate rises. Head over to The most flexible mortgage in the UK to find out more.

What do you think?

Are capped trackers a sensible option?

Have your say using the comment box below.

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