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Discounted Rate Mortgage

The discounted rate mortgage offers a discount from the lender’s standard variable rate for a given period. This reduction will then revert back to the standard variable rate (SVR) once the set period of the discount is up. For example, a 2% discount on a lenders SVR of 6.75% means that you would pay interest at a rate 4.75% for the period of the discount – that is of course assuming that the SVR remained at 6.75%. Equally, if rates were to fall then of course the repayments would too.

In much the same way as the fixed rate mortgage, it has been designed to attract borrowers to remortgage from their existing lenders.

You will see that some discounted mortgage products offer what is known as a ‘stepped discount’. For example, the discount may be 1.0% in the first year, 1.25% in the second year and 1.5% in the third year. The stepped discount is designed to give further encouragement to the borrower not to move his mortgage elsewhere before the discounted period ends.

Although the discounted rate mortgage is a variable rate product, the borrower does have the security that for a given period he will be paying less than the lenders standard variable rate. It is commonly known that generally lower standard variable rates are charged by building societies than by banks. This will be a factor for most people in choosing a suitable product.

There are considerations that the prospective borrower must take into account when contemplating a discounted rate mortgage:

- An arrangement fee may be made payable. (This amount will differ from lender to lender)

- An early repayment charge is likely to apply to deter part or full redemption during the discounted period. This may be calculated either as a fixed percentage of the amount redeemed, or, the actual amount of discount obtained received by the borrower up to the date of the part or full redemption.

- There is no protection against increases in the lender’s standard variable rate.

If you have a budget, a discount mortgage probably isn’t ideal for you. This is likely to include many first time buyers however; the initially low rate of a discount mortgage can provide much needed extra cash for other expenses incurred.

Discounted mortgages are most suitable for people who are looking for the cheapest initial payments at any given time but can afford any increased payments if interest rates rise. Likewise, if you believe that interest rates are likely to fall, or at least stay stable, a discounted mortgage makes continuing reductions to monthly repayments possible.