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A capped rate mortgage has an interest rate that cannot rise above a pre-determined level for a specified period of time. After the capped rate period expires, the interest rate of the mortgage reverts to the lender's Standard Variable Rate (SVR).

A cap and collar mortgage is similar to a capped rate mortgage except that is also has a lower limit, beneath which the interest rate cannot fall over a specified period of time. The upper limit is called the *cap* and the lower limit is called the *collar.*

For example, if a borrower applies for a cap and collar mortgage with a cap of 7% and a collar of 5% and a cap and collar period of two years, the interest will move between 5% and 7% during that period of time. If the lender's SVR rises above 7%, or falls below 5%, the interest rate on the cap and collar mortgage product will remain within this band.

A cap and collar mortgage provides the same hedge against future interest rate rises that a capped mortgage does, however, it will remove the benefit of being able to take advantage of future decreases in the lender's SVR.

This means that the lender will be more certain of the amount of interest it will be able to collect from the borrower during the cap and collar period. Because of this, the overall risk of the mortgage is reduced, and the lender can issue the cap and collar mortgage product with a slightly lower interest rate than a capped mortgage product without the collar attached.

A capped mortgage * with or without a collar attached * is a useful option for borrowers who wish to protect themselves against future interest rate rises. Capped mortgage products are at their most popular during periods of low interest rates that are predicted to end within the near future.

Capped mortgages are particularly useful for households with a tight budget such as those for first time home buyers and young families. The cap will help ensure that the monthly mortgage payments will not become unaffordable doe to unbudgeted interest rate rises during the term of the home loan. Home owners should take advantage of the predictable mortgage repayments and pay off as much of the balance of the loan as possible during this time.

It should be noted that capped mortgage applicants will normally be charged an arrangement fee by the lender. The capped mortgage will also usually come with a higher interest rate than a standard product with a variable interest rate that has no upper or lower limit and that can be changed at the lender's discretion.

Professional advice should be sought before applying for a capped mortgage to ensure that it is the right mortgage product for your individual needs. An independent mortgage broker will be able to provide you with impartial advice on cap and collar mortgages and whether or not they are suitable for your personal financial situation and will be able to search the entire UK mortgage market with specialist software.