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Discounted rate mortgages

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Discounted rate mortgages offer new customers cheaper rates for a fixed period of time – usually two to five years, but sometimes the entire life of the mortgage. The discount is usually a reduction of the lender’s Standard Variable Rate (SVR). So, where the usual interest might be 5%, you could get a lower rate of 4% for a fixed period.

How do the discounts work?

Discounted rates are a type of variable rate, so don’t expect your payments to remain the same throughout the term. Instead, you’ll benefit from a percentage point or two off the lender’s SVR – more about that below.

If the SVR is currently at 5%, but you have a 1% discount, you’ll pay 4%. Seems simple enough, but as it’s variable, the SVR may increase to 6%, or even 7%, in which case you would pay 1% less each time. The same applies if the SVR goes down too.

Most discounted rate mortgages are not cheaper for the entire life of the mortgage – although some are – so when you’re introductory period expires, you’ll be automatically transferred onto the SVR.

Once the discounted rate is up, you always have the option of switching to a fixed rate mortgage, so that you’re not paying over the odds on the lender’s Standard Variable Rate.

discounted rate mortgage

What is SVR?

As there’s a lot of talk about SVR with discounted rate mortgages, it’s important that you understand what it is and how it works. The Standard Variable Rate is an interest rate determined by the lender – meaning that it does not track the Bank of England base rate.

Lenders can choose to increase or decrease the SVR whenever they like – there doesn’t even have to have been a change in the base rate. This means that they are often much more expensive than tracker mortgages and you don’t get the benefit of a fixed rate.

Drawbacks to discounts?

When someone offers you a discount, it’s difficult to turn it down, but where there are pros, there are bound to be cons. It’s important that you look at both sides of the coin before getting locked into a bad deal.

One of the biggest negatives to a discounted rate mortgage is the Early Repayment Charge. With most SVR mortgages, you don’t have to pay this when remortgaging or paying off early, but this is often not the same if you’ve got a discounted rate.

For those with lifetime discounts (a rare, but welcome feature), you’ll likely only face an Early Repayment Charge for the first few years, as it would be rather unfair to face it for the entire term. Another thing to consider is that most of these mortgages will have a ‘collar’ meaning that if the SVR falls below that rate, you won’t receive the discount.

Discounted rate mortgages might sound like the best way to go, but when you weigh up the advantages and disadvantages, as well as look at what else is available on the market, you might find a cheaper deal elsewhere.

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About Jemma Porter

About Jemma Porter

Jemma Porter is an experienced content creator who has written for a number of online publications. A self-confessed penny pincher; she's often found seeking out the best personal finance deals.

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