Fixed-rate and capped-rate mortgages are two types of mortgage products that offer different ways to manage the interest rate on a home loan. Here are the main differences between the two:

Fixed-Rate Mortgages

A fixed-rate mortgage has an interest rate that remains the same for a specified period, typically between 2 to 10 years. Here are the key characteristics:

• Interest Rate Stability: The interest rate is fixed, providing predictable monthly payments throughout the fixed-rate period.
• Certainty: Borrowers know exactly how much they will pay each month, which helps with budgeting and financial planning.
• Protection Against Rate Increases: Borrowers are protected from rising interest rates in the market during the fixed-rate period.
• Potential Higher Initial Rate: Fixed rates can be higher than variable rates at the time of mortgage approval because the lender is taking on the risk of potential rate increases.
• Less Flexibility: Early repayment or switching mortgages can incur early repayment charges (ERCs) during the fixed-rate period.

Capped-Rate Mortgages

A capped-rate mortgage is a type of variable-rate mortgage where the interest rate can fluctuate but has an upper limit (the cap) beyond which it cannot rise. Key characteristics include:

• Variable Interest Rate: The interest rate can go up or down based on market conditions, similar to a standard variable-rate mortgage.
• Upper Limit (Cap): The cap sets a maximum rate that the interest can reach, providing some protection against significant rate increases.
• Potential for Lower Payments: If interest rates fall, monthly payments can decrease, offering potential savings compared to fixed-rate mortgages.
• Uncertainty: Payments can vary, making it harder to budget compared to a fixed-rate mortgage.
• Protection: The cap provides a safety net, ensuring that rates won’t exceed a certain level, which can be reassuring for borrowers concerned about rising rates.
• Possible Higher Cap Rate: The capped rate can sometimes be higher than the initial rates offered on fixed-rate mortgages due to the protection provided by the cap.

Summary of Differences

• Stability vs. Flexibility: Fixed-rate mortgages offer stability with predictable payments, while capped-rate mortgages offer flexibility with the potential for lower payments if interest rates fall.
• Risk: Fixed-rate mortgages eliminate the risk of interest rate increases during the fixed period, while capped-rate mortgages limit but do not eliminate this risk due to the cap.
• Budgeting: Fixed-rate mortgages provide certainty for budgeting, whereas capped-rate mortgages require borrowers to be prepared for possible changes in their monthly payments.
• Interest Rate Protection: Fixed-rate mortgages protect against all interest rate increases during the term, while capped-rate mortgages protect only up to the capped rate.

Choosing between the two depends on the borrower’s financial situation, risk tolerance, and preferences for stability versus potential savings.