What are capped rate home loans?

A capped rate home loan is a mortgage that has a capped interest rate for a certain period of time, which can’t be surpassed; owever, as opposed to fixed rate loans, this interest can rise and fall as long as it’s under the capped amount.

To give you an idea of what a capped home loan can look like, say the cap rate is 7.5 percent per annum (p.a.) and the capped period is three years, your interest rate won’t go above 7.5 per cent p.a. during the first three years of the loan.

Essentially, a capped rate home loan is like a variable rate home loan but with a barrier that prevents the interest from exceeding a specific point. This barrier allows you to know beforehand what the highest repayment you may have to make is.

However, these are extremely rare, if not impossible to find nowadays. At the time of writing, there are no capped rate home loans on the RateCity database.

The ultimate advantage of having a capped home loan was that you benefit when interest rates drop (because your repayments will drop as well), while also being protected from the repercussions of significant interest rate rises. You could also make additional repayments more freely, compared to a fixed rate loan which typically does not offer flexible features like this.

These rewards, however, came with risk. That is, if capped rate loans have a higher comparison rate than fixed rate loans for the same period, or if interest rates drop rather than rise, then they may not be as competitive.

Once the capped rate home loan reached the end of its capped period, you could either recap it or switch to a fixed or variable rate. This is very similar to what happens when a fixed rate period ends.

Unfortunately, you will find it near impossible to get a capped rate home loan in today’s home loan market. It may instead be worthwhile comparing the current interest rate options; variable rates, fixed rates or split rates. 

The closest option we have to capped rate mortgages today is a split rate home loan. As the name suggests, this involves splitting your home loan between a fixed and a variable interest rate.

A portion of your loan will be on a fixed interest rate, meaning a portion of your mortgage repayments will remain the same and will be protected from loan fluctuations. Another portion will be on a variable rate, meaning you can take advantage of helpful features. Most significantly, if rates fall your interest rate and repayments will too for this portion of your loan.

You do not have to split your rates 50/50 either, and you can choose to split anywhere from 60/40 to 80/20 and beyond - depending on your preferences.