What is a discounted Rate?

 

A discounted mortgage is a type of variable rate mortgage where the interest rate you pay is set at a discount below the lender’s standard variable rate (SVR) for a specified initial period. After this period, the rate typically reverts to the lender’s SVR. The discounted rate can offer lower monthly payments compared to other mortgage types during the discount period.

Key Features of a Discounted Mortgage:

1. Discounted Rate:
• The mortgage interest rate is reduced by a certain percentage below the lender’s SVR for an introductory period, usually between 2 and 5 years. For example, if the SVR is 4% and the discount is 1%, you would pay an interest rate of 3% during the discount period.
2. Variable Payments:
• Since the SVR can change, your monthly payments can vary during the discount period. If the SVR goes up or down, so will your payments.
3. Initial Period:
• After the discount period ends, the interest rate usually reverts to the lender’s SVR, which can result in higher monthly payments.
4. Early Repayment Charges (ERCs):
• Many discounted mortgages come with ERCs if you repay the mortgage or switch deals during the discount period.
5. Flexibility:
• Some discounted mortgages offer more flexibility, but this can vary by lender and specific mortgage product.

Advantages:

• Lower Initial Payments:
• The discounted rate can provide lower monthly payments during the introductory period, making it easier to manage finances.
• Potential for Savings:
• If the lender’s SVR remains low, you could benefit from lower payments for the duration of the discount period.

Disadvantages:

• Variable Payments:
• Payments can increase if the lender’s SVR rises, making budgeting more challenging.
• End of Discount Period:
• After the discount period ends, the rate reverts to the SVR, which could be significantly higher, leading to higher payments.
• Early Repayment Penalties:
• If you want to repay the mortgage early or switch to a different mortgage during the discount period, you might incur ERCs.

Considerations:

• SVR Fluctuations:
• Understand how often and by how much the lender’s SVR has changed historically, as this will impact your payments.
• Future Financial Planning:
• Plan for the end of the discount period and consider whether you might want to remortgage to a different deal at that time.

 

• Comparison:
• Compare discounted mortgages with other mortgage types (like fixed or tracker mortgages) to see which offers the best overall deal based on your financial situation and risk tolerance.