It is fair to assume that, in a climate where uncertainty on base and borrowing rates pre-dominates, a capped-rate mortgage would tick plenty of boxes for borrowers.
On the face of it, having a maximum payment clearly defined while taking advantage of falling rates, should they head south, has a lot going for it.
So why are we not reading much about capped-rate products right now? Is there no enthusiasm for this once-popular option?
It depends on which side of the fence you sit. There is certainly interest from brokers, as London & Country Mortgages associate director of communications David Hollingworth explains.
There may be restrictions from some lenders’ funders in terms of what they are allowed to release
“I’m a big fan of capped rates but sadly they seem to have wandered onto the extinction list. They would certainly carry plenty of appeal in a market where borrowers have been reeling from big hikes in rates but are still hoping they can look forward to rate improvements over the next year.”
Hollingworth believes a capped rate would provide a valuable solution, giving the security that homeowners need due to the higher cost of living while alleviating hesitation about whether they could be locking in just before rates fall.
He adds that some of the most popular deals to ‘fly off the shelf’ in the past were capped rates; and, when priced well, they can look like the best of both worlds. However, the issues that can hold them back can be two-fold.
“If the cap is substantially higher than the corresponding fixed rate, some will decide to plump for the fix; but the level of the variable rate will also have a bearing on how customers react.
“Even if the cap is only a little higher than a similar fixed rate but the underlying variable rate is substantially higher, it could limit the popularity.”
What if capped rates had been an option in recent years and clients had taken deals capped at, say, 3%? Lenders would be sad
Looking historically at capped rates, Hollingworth points out that, typically, the cap was applied to the standard variable rate (SVR), which could be several percentage points higher. Therefore borrowers would be put off paying a higher cap if they felt there was little chance of rates falling far enough and fast enough.
“One of the most compelling structures I’ve seen was a capped tracker where the cap and underlying base-rate tracker were competitive enough to add up to a great overall package.”
He concludes: “But that was a very long time ago. It’s really a question for a lender but, presumably, the cost of funding a capped rate is higher and/or more complicated, which may simply make it difficult to price competitively.
“It’s certainly a product that we have continued to champion and would be ideally suited to the current climate.”
I do think that customers would find capped rates attractive if they had them to choose from. It may not be so attractive to the lender, though
Kerr & Watson mortgage broker Stephen Kerr suggests the absence of capped-rate mortgages may be a result of lenders playing it safe or not seeing large demand in the past to justify releasing capped products now.
“They could be treading cautiously in a market that has seen its fair share of unpredictability, and wanting to not limit the uplift when rates rise, unless there is a clear demand for a product that’s effectively in the middle of SVR and fixed.”
He agrees with the premise that capped rates would be suitable on many occasions and, if most lenders offered them, and brokers promoted them, there could be many borrowers signing up.
“Knowing that they cannot pay more than a certain amount, but may be paying less if things go in the right direction, could definitely be appealing. This would, of course, need lenders to release them first and advisers to educate clients on the products.”
But are lenders likely to release capped-rate products in any significant number? Kerr is not holding his breath.
It’s certainly a product that we have continued to champion and would be ideally suited to the current climate
“I do think that customers would find them attractive if they had them to choose from. It may not be so attractive to the lender, though, if rates increase, with the lender wishing the borrowing was on a product that did not have an upper limit.”
Borrower demand might be there but, without product supply and competition in this space, the capped-rate option is unlikely to gain much traction.
As Kerr explains, lenders may be hesitant to release these products unless there is a clear need to do so.
“If they do not think they’re missing out on deals and there are no other lenders within their space releasing them (and seeing large success off the back of them), they may just stick to their conventional products. There may also be restrictions from some lenders’ funders in terms of what they are allowed to release.”
Marchwood IFA mortgage adviser James Gordon takes a similar line, seeing scant motivation for a lender to launch capped-rate deals.
I’m a big fan of capped rates but sadly they seem to have wandered onto the extinction list
“Obviously it’s very attractive to a client as it’s win/win, but it’s really zero incentive from a lender’s perspective unless there’s a premium on the initial rate.”
He continues: “I suppose also, given recent history, what if capped rates had been an option over the past few years and clients had taken out deals that were capped at, say, 3%?
“Lenders would be very sad, so that’s maybe a position they would be reticent to risk putting themselves in, going forward, even if all indicators are that things will go down slowly from here.”
This article featured in the December 2023/January 2024 edition of MS.
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