Capped rate home loan

If you are tired of fluctuating interest rates on your home loan, yet are uncomfortable with the finality of a fixed rate loan, then you may find that a capped rate home loan is suitable for you.

What is a capped rate home loan?

A capped rate home loan is a variable rate loan that has the additional facility of having a maximum interest rate. This simply means that with this type of loan you can benefit when the interest rates drop and at the same time you will be more secure and protected when interest rates rise.

A capped rate home loan is generally capped for a period of about three years. After this set period you can negotiate and have your loan recapped, or have your loan converted into a fixed rate loan or a variable rate loan.

How does a capped rate loan compare to a fixed loan?

A fixed home loan has a fixed interest rate, hence the term “fixed”. This means that it does not matter if rates go high or low, your interest rate will remain the same. Therefore, you are both protected and are unable to benefit from low interest rates.

A capped rate loan on the other hand can move up or down depending on existing rates. However, if there is a substantial increase in rates no matter how high, you are protected and your rate cannot go over the agreed cap. You can also make substantial additional repayments to a capped rate loan, this means that a capped rate offers more flexibility than a fixed rate loan.

Are capped rate home loans a cheaper option?

Capped rate loans are generally cheaper than fixed rate loans, as it is possible to benefit from low interest rates while at the same time being protected from interest rate spikes. With a capped rate home loan the variable rate that you pay is usually 0.3% to 0.4% more than the professional package discounts offered by the major lenders. As with a fixed rate loan, there is usually a rate lock fee or equivalent. This fee is usually 0.15% of the loan amount at the time the loan is advanced to you. For more details on rates and fees which can vary depending on the lenders, please contact us for up to date information.

Why should I choose a capped rate?

There are three reasons why one should decide on a capped rate home loan, these are:

• Capped rate home loans are usually cheaper than fixed rates.
• This type of loan is more flexible, and is similar to variable rates where you can make extra repayments without suffering from any penalties (maximum extra payments of 50% of the loan amount within the capped term).
• You will be protected from any unexpected interest rate increases in the market.

When is the best time to lock in your rate?

Timing the locking in your interest rate is important, as you want to be able to enjoy the lowest possible variable interest rates yet lock in before the RBA begins increasing rates.

A good time to lock in your rate is when there is a trend of rising interest rates. This will protect you from high interest rates that you cannot afford. However, it is worthy to note that it is very difficult to predict whether interest rates will continue to rise or fall. We recommend you seek independent financial advice in this regard.

How much can I borrow?

The amount you can borrow for a capped rate home loan can range up to 90% of the property value (90% LVR). The minimum loan amount for a capped rate loan is $100,000.

Do I need to get Lender’s Mortgage Insurance (LMI) for a capped rate home loan?

Generally LMI is required for a loan to value ratio (LVR) of 80% or greater, anything below this figure does not require LMI.

What is the maximum LVR allowed?

The maximum LVR allowed for a capped rate loan is currently set at 90%. However LMI premiums can be capitalized above the 90% LVR amount.

Apply for a capped rate home loan now!

Please enquire online. We specialise in capped rate loans and can provide you with all the information you need. Our mortgage brokers can choose the best lender who can provide you with an affordable capped rate home loan.