A discounted rate mortgage takes the standard variable rate and then sweetens the deal for the borrower with a fixed reduction. As an example, if the standard variable rate was 3% and you sign up to a mortgage with a discount of .5% then you would be paying an interest rate of 2.5% every month. As with the standard variable rate, the borrower’s mortgage payments can therefore fall or rise depending on the standard variable rate of the lender and the Bank of England base rate.
The advantage of a discounted rate is that you get all the benefits of a standard variable rate mortgage and then a further discount too. If the standard variable rate drops, so will your discounted rate mortgage. But on the other hand, if the interest rate was to rise, your discounted rate mortgage would rise also, albeit with the same discount applied.
Discounted rates, as with standard rates, react to the market and the interest rates set by the Bank of England. But it is also worth noting that lenders can also adjust their own rates over and above the market rate for their own financial reasons, either to match competitors, maximize profits or attract new business. The discounted rate that you are offered will be for a fixed period, usually between two and five years and when that period ends the mortgage will simply revert to the lender’s standard variable rate. Because you are getting a discount, you will not, in all likelihood, be able to make early repayments or overpay (during the discount period) without charges and/or penalties. As with standard variable rate mortgages it is important for people to consider that the interest rates may go up and to be sure that they could cover the extra costs if they do.
In summary then:
Advantages of Discounted Rate Mortgages – All the benefits of standard variable rate mortgages (freedom, flexibility and the potential for rates to drop saving you money) coupled with an element of security when you first sign up. The discount will mean lower payments when you are first setting up your home and allow you to get on your feet.
Disadvantages of Discounted Rate Mortgages – As with standard rate mortgages, the main disadvantage is that rates can go up as well as down so you need to be prepared for an increase in payments. Also, while you are within the discounted period you cannot make early repayments so bear that in mind.