Definition
A capped (or "capped variable") rate is a variable rate paired with a contractual ceiling — the "cap" — above which the rate cannot rise during the term, even if the prime rate climbs sharply.
The cap is typically set 1% to 2% above the starting variable rate. In exchange for this protection, the negotiated spread below prime is less favourable than on a plain variable (e.g. prime – 0.25% instead of prime – 0.75%). You are paying an implicit insurance premium against extreme hikes.
In Québec, Desjardins and certain alternative lenders have historically offered capped products. They are less common among Big 6 anglo-Canadian banks. Ask whether the cap applies only to the contractual rate or also to the payment calculation (static-payment variant).