With this type, the initial interest rate is based on the lenders variable rate, but with a guarantee for a set number of years that the interest rate will not exceed a preset level, known as a cap. Should the lenders variable rate increase to above the selected 'capped' rate, the rate used to calculate interest would remain at the lower 'capped' rate whilst still in the period.

Advantages:

• Ideal if you want to benefit from decreases in the variable rate but do not want to be financially disadvantaged if the rate should increase.

Disadvantages:

• When the capped rate period ends, the charge rate will be the variable interest. If this is higher than the capped rate, the payments will increase.
• There is often an Early Repayment Charge for paying more than the planned amount during the capped term, (although some lenders do allow limited extra payments).
• If you want to move home during the capped period, you may not be able to do so without needing to pay an Early Repayment Charge. (unless the loan is classed as being portable).