Does Australia have capped rate mortgages?

In the past you may have come across the term ‘capped rate’ to describe a type of interest rate. While capped rate mortgages may no longer be offered, there are still ways homeowners can protect their home loan repayments from higher rates.

What are capped rate mortgages?

Capped rate mortgages described a type of home loan rate in which the interest rate would move similarly to a variable rate and fluctuate with the market, however there was a cap in place on how high or low it can be changed. This type of interest rate was a sort of combination of the best of both variable and fixed rates.

However, there are no capped rate mortgages on the RateCity database, and at the time of writing, our editors were unable to find a loan product like this advertised from CommBank, ANZ, Westpac or NAB. You may find it difficult to find a capped rate mortgage product in the current market.

What alternatives to capped rate mortgages are there?

There are three options that Australian homeowners have when it comes to their interest rate: variable rates, fixed rates or splitting your rate between the two.

Variable rate home loans are subject to market fluctuation and should ideally move as the Reserve Bank of Australia moves the cash rate, or at the lender’s discretion. This means that if rates are on the rise, it’s likely your interest rate and therefore your home loan repayments will increase too. But if interest rates fall, you’ll reap the benefits of a lower rate and lower repayments.

Fixed rate home loans lock in your interest rate for a fixed period, typically 1-5 years. In this time frame your interest rate will not change despite how the market performs or how your lender moves variable rates.

This could help to protect your mortgage repayments from a higher rate environment, just like a capped rate. But you will miss out on any rate reductions in this fixed period. Further, fixed rate home loans don’t typically come with features, like an offset account.

The closest option you may have to a capped rate mortgage today to get the best of both words is considering a split rate. As the name suggests, this involves splitting your home loan between a fixed and a variable interest rate.

A portion of your loan (whatever you prefer, not just 50/50) will be on a fixed rate and therefore some of your repayments protected from loan fluctuations. Another portion will be on a variable rate, meaning you can take advantage of helpful features, and if rates fall your repayments will too.

How else can you manage your home loan repayments?

If you were considering a capped rate mortgage to better manage your home loan, there are other alternatives that can reduce your monthly repayments. This includes:

• Makingextra repayments – if your home loan allows you to make additional repayments this can help chip away at your principal owing and reduce your home loan payments over time.
• Offset account – Any funds you deposit into your offset account may work to ‘offset’ or reduce the amount of interest charged on your mortgage.
• Redraw facility – The extra repayments you make into your home loan may be drawn down upon, such as for a home loan renovation. And like an offset account, the funds you pay into the redraw facility may work to reduce your interest charges.

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