Cap And Collar

Used to describe an interest term that cannot exceed the cap, and will not fall lower than the collar. Many capped rate mortgages will have a minimum rate they can fall to known as the collar.

A cap and collar mortgage provides the same hedge against future interest rate rises that a capped mortgage does, however, it will remove the benefit of being able to take advantage of future decreases in the lender's Standard Variable Rate.

This means that the lender will be more certain of the amount of interest it will be able to collect from the borrower during the cap and collar period. Because of this, the overall risk of the mortgage is reduced, and the lender can issue the cap and collar mortgage product with a slightly lower interest rate than a capped mortgage product without the collar attached.

A capped mortgage - with or without a collar attached - is a useful option for borrowers who wish to protect themselves against future interest rate rises. Capped mortgage products are at their most popular during periods of low interest rates that are predicted to end within the near future.

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