What Is The Difference Between Capped And Variable Rate Mortgages

There are a variety of different mortgages, but capped rate mortgages and variable rate mortgages are quite similar in nature. In fact, they’re the exact same except for one small thing, but that small thing can make a big difference.

If you want to know what the difference is between capped and variable rate mortgages, then this article has the information you need. With this knowledge, you’ll see which one is better for you.

What are variable rate mortgages?

With most mortgages, you pay a small part of your property’s full price – with interest. This interest will vary depending on the loan itself and variable rate mortgages have an interest rate that will have the ability to vary from month to month.

With a variable rate, your interest will be based on the market’s rates and if they drop, so does the amount that you need to pay for that duration. But it can also raise, so you could end up paying more interest than you originally agreed to.

With this kind of mortgage deal, you can’t change your interest rate – and you could end up needing to pay out a lot of money if it goes too high. But if it drops very low, then you’ll be paying a lot less money, which can be spent on other things that you may need or want.

Often, people who have a variable rate mortgage tend to spend less money on their interest over the mortgage’s duration than people with fixed rate mortgages (which are similar, but the interest stays the same), but it’s not certain that you would get a low interest rate the whole time.

What are capped rate mortgages?

This is where it gets interesting. With variable rate mortgages, there is no limit on how high your rates can go. Capped rate mortgages have a cap however, so there is a limit as to how high the rate can increase.

Even if the market’s rates go further than the set limit, your interest rate won’t go any further, so you’ll always know what the most amount of cash you’ll need to pay will be. The benefit is that when the rates go down, you’ll pay less interest!

Both of these types of mortgages are similar, but capped rate mortgages can be much more beneficial in the long run. Speak to a mortgage broker to get a full understanding of these products.

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