Remember capped mortgages? While never mainstream, there was a time in the not-too-distant past when they were an established feature of the market.
One of the main selling points was their flexibility: you got the upside of a tracker, with your monthly repayments falling as rates fell, while knowing they would never rise above a certain level.
However, following the financial crisis, these products slowly disappeared from the market. When I have asked lenders why over the years, they typically say there was not much for them in a decade-long era of rock-bottom rates.
That's fair enough. But nearly two decades on from the crisis – and in a more normal rate environment – the case for bringing them back arguably looks stronger than ever.
These days, mortgage options are fairly rigid: you either opt for a fixed rate or a tracker. And even then, the vast majority of borrowers opt for a fixed rate, due to uncertainty over the future direction of interest rates.
Bank Rate has been held at 3.75% for four consecutive meetings and, overall, most observers expect the Monetary Policy Committee to keep it at that level for the remainder of the year, at least. But that's neither guaranteed and some analysts believe rates may have to rise if inflation increases.
It’s little wonder then that borrowers are nervous, confused and are struggling to know how to proceed. Faced with that, most default to the confidence a fixed rate delivers, even if it means missing out should borrowing costs fall.
That's exactly the problem a capped product was designed to solve: the potential for lower repayments that a tracker delivers combined with some of the protection of a fixed rate.
It's also worth being clear this isn't a product suited to every borrower. But if you're tempted by a tracker yet wary of leaving yourself exposed if rates climb, a cap offers a way to take that calculated risk without the open-ended downside. It protects you against any near-term increase, while still leaving the door open to benefit if rates eventually fall.
The challenge for lenders, of course, is pricing these products, since margins can come under pressure if borrowing costs change rapidly. But that risk is more manageable than it sounds.
Lenders set the cap themselves, so they can fix it at a level they're comfortable with – and pricing the loan like a five-year fix, rather than a standard tracker, would provide protection from volatile swings in borrowing costs. Applying a collar, where the rate the borrower pays would not fall below a certain level, would also protect the lender’s margins if rates were to fall again as low as they were before the pandemic.
For borrowers, that might mean accepting a slightly less competitive headline rate than a standard tracker. But that's the price you pay for the security a cap offers.
I am not suggesting capped mortgages would become the product of choice across the market. But I have no doubt there would be demand for these loans – demand that is currently going unfulfilled – and I believe brokers would find them a useful addition to their armoury.
The real question isn't whether the demand exists; it's whether there is a lender out there willing to run the numbers again and bring back a product feature that could offer real value to certain borrowers.
