What is a Discounted Rate Mortgage?
Learn how a discounted rate mortgage works and how it can benefit your financial planning.
A discounted rate mortgage offers a reduction on the lender’s standard variable rate (SVR) for a set period. This type of mortgage can provide lower initial monthly payments, making it an attractive option for many borrowers.
What is a Discounted Rate Mortgage?
Learn how a discounted rate mortgage works and how it can benefit your financial planning.
A discounted rate mortgage offers a reduction on the lender’s standard variable rate (SVR) for a set period. This type of mortgage can provide lower initial monthly payments, making it an attractive option for many borrowers.
How Does a Discounted Rate Mortgage Work?
With a discounted rate mortgage, your interest rate is set at a certain percentage below the lender’s SVR for a specified period, typically between two and five years. For example, if the lender’s SVR is 4% and your discount is 1%, you would pay an interest rate of 3%.
The key feature of this mortgage is that while you benefit from a lower rate initially, the actual rate you pay can change if the SVR changes. This means your payments could increase or decrease during the discount period, depending on the lender’s SVR adjustments.
Length of Discounted Rate Mortgages
Discounted rate mortgages usually offer terms ranging from two to five years. Some lenders might provide even longer discount periods. It’s important to understand that once the discount period ends, your interest rate will revert to the lender’s SVR unless you remortgage or arrange a new deal.
Advantages of Discounted Rate Mortgages
- Lower Initial Payments: The discount on the SVR means you start with lower monthly payments, which can be beneficial for budgeting, especially in the early years of your mortgage.
- Potential for Savings: If the lender’s SVR decreases during your discount period, your interest rate and monthly payments will also decrease.
- Flexibility: Discounted rate mortgages often come with shorter terms, giving you the opportunity to reassess your mortgage options sooner.
Disadvantages of Discounted Rate Mortgages
- Variable Payments: Since the discount is applied to the SVR, your monthly payments can vary if the lender changes their SVR.
- Potential Increases: If the lender’s SVR rises, your mortgage payments will also increase, potentially making it harder to budget.
- End of Discount Period: When the discount period ends, you’ll revert to the SVR, which may be higher than other available rates. This could lead to a significant increase in your monthly payments if you don’t arrange a new mortgage deal.
- Early Repayment Charges: Exiting the mortgage before the discount period ends might incur early repayment charges, which can be costly.
What Happens When the Discount Period Ends?
After the discount period, your interest rate will revert to the lender’s SVR. This rate is variable and can change over time, often resulting in higher monthly payments. It’s advisable to review your mortgage options and potentially remortgage before the discount period ends to secure a more favourable rate.
Need Further Guidance?
A discounted rate mortgage can offer initial cost savings and flexibility, but it’s essential to understand the implications of variable payments and the end of the discount period. For tailored advice and to explore the best mortgage options for your situation, contact our expert team at Empreso Private Clients. We are here to assist you in finding the mortgage solution that best fits your financial needs.
