Caps & Collars
Capped rate
Your payments are variable and often linked to a base rate, but fixed not to go above a set level (the 'ceiling' or 'cap') during the period of the deal. At the end of the period, you are usually charged the lender's standard variable rate
There are often penalties, sometimes during any special deal period, and maybe even after the period too
You know the maximum you will pay for a set period of time.
Useful if you want the security of knowing that your payments can't rise above the set level, but still benefit if rates fall.
Collared rate
May be used in conjunction with a capped rate or a tracker (or both). Your payments are variable but will not fall below a set level (the 'collar').
There are not usually any penalties, unless it is used in conjunction with a capped rate or a special-deal tracker rate (or both). But check and see.
It may be part of another interest-rate deal which otherwise appears attractive. But note that if the rate payable is only just above the 'collar' and you think rates will fall, you may not get the full benefit of a reduced payment