Mortgages - Have caps lost their appeal?

Capped and extended tie-in mortgages have lost their appeal, according to mortgage data provider, Moneyfacts.co.uk. Indeed, Julia Harris of Moneyfacts says that as house prices continue to rise and buyers struggle to climb on to the housing ladder, the mortgage market has needed to become very dynamic.

Today there are over 10,000 prime and sub prime mortgages available, with a multitude of variations in lending criteria and deal types. As a consequence some mortgage products have gone out of vogue.

Harris argues that 6 months ago capped rate deals had almost vanished, with only 4 products available compared with 38 on offer 5 years ago. As expected in a rising rate economy their popularity has grown, but still there are only 11 products to choose from, offered by Abbey, Coventry BS, Godiva Mortgages, Hinckley & Rugby BS, Kent Reliance BS, Marsden BS, Skipton BS and Woolwich.

"Deals range between 2 and 5 years, carrying arrangement fees between £495 and £999. With the capped rates sitting between 5.68% and 6.29%, the maximum rate is far in excess of many of today's fixed rate deals.

"Additionally 4 of the products already pay the capped rate, while the other pay rates range between 0.10% and 0.44% lower than the cap. The average pay rate of these deals is currently 5.78%, already over half a percent higher than many tracker mortgages," she adds.

While the pay rate of these capped rate deals remains relatively high, fixed rate deals will continue to offer a very creditable deal for those looking for protection against rate rises. Capped deals will come into their own if rates are expected to fall in the short term or in times of extreme uncertainty.

Meanwhile, extended tie in products, according to Harris, were originally designed to offer borrowers low initial monthly repayments, at a time when expenses were stretching with moving costs and gave first time buyers (FTB) time to settle into their new financial commitments.

But the danger always was when the low deal rate finished and the higher tie in rate was charged. Many may not have factored this into their financial plans, and often faced a nasty shock when their mortgage repayments rose sharply.

17 April 2007 © Moneyextra.com

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