discount rate mortgages

Discounted Rate Mortgages

explained

As the mortgage provider market has become increasingly competitive over the last few years lenders are having to find better ways to attract new customers. One such way that has become very popular in both the UK and US recently has been to offer discounts.

Lenders offer a large initial discount on the interest rate for a set period of time, helping them to stand out from the crowd of tracker and fixed rate loans. Discounts apply for the specified period before they revert back to the lenders standard variable rate. Here is an example:

If a lender is offering a discount of 2% for 24 months and their standard variable rate (SVR) is 5% then for the first two years you would pay only 3% interest (5%-3%). After the two year period is up you will revert to paying 5%, or whatever the lenders SVR is at that time. What you must remember however is that the Discounted rates are variable themselves. If the lenders SVR increases by 1% after 1 year then the rate you pay will increase to 4% until the end of your discount period.

Similar to Fixed Interest loans discounted deals often carry steep redemption penalties should you decide to switch mortgages or pay back the loan before the discount period has expired.

Another trick tat some lender use is to offer a very large discount which is instantly appealing to potential borrowers. However you should also consider the other fees that you have to pay the mortgage company: mortgage set up fees and mortgage valuation fees. These can offset any savings an extra large discount for 2 years may give you so be sure to consider all of the fees involved in taking out the loan, not just the initial discount rate.

One common tactic amongst borrowers is to skip from discounted mortgage to discounted mortgage as soon as their discount period ends and they are free of any redemption penalties, taking advantage of the discounted rates on offer. This can be a great way to save money but as mentioned above you should be wary or set up fees which can be high on these loans. In addition it is crucial to pay attention and consider moving your loan when you discount period ends. If you forget you could end up needlessly paying a higher rate.