Shopping for a mortgage can be an overwhelming task. There are several mortgage options available, and the consumer must first understand the terms associated with each of the options in order to make an informed, intelligent choice. Knowledge of the following terms will help guide the mortgage shopper interested in a capped rate mortgage.

A capped rate mortgage is a type of repayment mortgage. Repayment mortgages are traditional mortgages. Each monthly payment is a combination of both a capital payment and an interest payment. Capital payments reduce the amount of the actual mortgage loan, or capital, and interest payments cover the interest charges on the loan. Interest is the amount of money that a bank or other financial institution charges a consumer for borrowing money and is expressed in terms of a percentage of the loan amount.

Capped rate mortgages utilize both variable and fixed interest rates. Interest rates for these mortgages are variable in that they can increase or decrease over the life of the loan period. The Bank of England periodically assesses the current base interest rate and makes adjustments as necessary. Capped rate mortgage lenders then increase or decrease their variable rates according to the Bank of England’s interest rate modifications. A cap, or limit, is determined for the capped rate mortgage at the time the mortgage is issued. This is a fixed maximum interest rate for the mortgage. Even if the Bank of England’s base interest rate is set higher than the mortgage cap, the mortgage owner will never be charged more interest than the predetermined cap interest rate.

An arrangement fee is a common charge for capped rate mortgages. Lenders consider a capped rate mortgage to be a convenient mortgage alternative for the consumer, and arrangement fees are an additional fee the borrower pays for the extra benefits of this type of loan. The arrangement fee also helps to cover any losses the lender could potentially incur from the loan arrangement.

Most capped rate mortgages have an early repayment charge. This is an additional charge paid by the consumer if the mortgage is paid off earlier than the agreed upon mortgage loan term. The expectation of any financial institution is that they will have the borrower’s business for the length of the mortgage term. If the mortgage is paid off early, the lender imposes a penalty as compensation for lost business. This charge is also sometimes referred to as an early redemption penalty.