Could a "Capped" or "Drop Lock" Mortgage be for You

With the current unpredictability as to when mortgage rates are going to rise, a "Capped" or "Drop Lock" mortgage could be a way to hedge your bets.

A capped rate mortgage will generally offer a tracker rate that is"capped", meaning there is a maximum rate of interest that can be charged on the mortgage during capped rate period.

For example, the mortgage may offer a rate that will track the Bank of England Base Rate plus 2%, giving a current rate of 2.5%, with the assurance that the rate has a cap of 5%. The result is that during the capped rate period you will be taking advantage of the current low rate but should the Bank of England Base Rate start to rise, you know that the rate you are charged will not go above 5% during the capped rate period. This will help with effective budgeting.

A "Drop Lock" mortgage, also referred to as "Switch and Fix" or "Track and Fix" mortgages, is offered by several lenders and offers the opportunity to select a tracker mortgage with the comfort of knowing that if rates start rising the lender will allow you switch to one of their fixed rate products without penalty. 

With a "Drop Lock" mortgage it is important to be aware that should you at a later date wish to fix your mortgage, you would need to switch to a fixed rate offered by the lender as if you were to move to another lender, who may be offering better rates, it is likley you would need to pay early repayment charges. 

It is also likely that when you decide to fix your mortggae because rates are on the rise, the fixed rate you attain could well be substantially hgher than the rate you may heve acquired if you had opted for a fixed rate mortgage in the first place.

Whether one of these options could be the best way forward for you will depend on a number of factors, including your attitude to risk, and it would be a good idea to seek advice from an Independent Mortgage Broker or Independent Financial Adviser before deciding.

Steve O'Mara