An interest rate on a loan or mortgage that will not rise above an agreed rate for an agreed period of time.
With a capped rate loan the borrower pays the floating rate or the capped rate, whichever is the cheaper on each applicable interest payment date:
- When the floating rate is lower than the capped rate, the borrower pays the floating rate.
- When the floating rate is higher than the capped rate, the borrower pays the capped rate.
Capped loans can be created by either the lender or the borrower, either by combining an interest rate cap with a floating rate loan or by combining an interest rate floor with a fixed rate loan.
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