Discounted Mortgages Explained
One of the most common types of mortgage, along with a fixed rate mortgage, is the discounted mortgage. In basic terms a discounted mortgage is a type of variable rate mortgage that sits at a certain amount below the lender’s standard variable rate, and therefore is ‘discounted’. As the rate is variable and is linked to the standard variable rate, should the standard variable rate increase, then your discounted rate will also increase.
A discounted mortgage rate is usually available for between two and five years and will have varying levels of discount associated with each one. While you are on the discounted rate you are likely to have restrictions placed on the amount you are able to repay each year over and above the amount you repay in your normal monthly repayments. You will also find that you have an early repayment charge if you choose to pay off the mortgage in full.
At the end of your discounted rate period you have two options. The first is that you remain with the same mortgage and your lender will then put your interest rate up to their normal standard variable rate, or you can choose to remortgage and to choose a new deal. Make sure you know your deal length though as you will incur additional fees if you attempt to remortgage too soon.
The benefits of opting for a discounted tracker mortgage are that you can be sure that for the term of your tie-in period you can be sure that the interest rates you pay will remain below the standard variable rate of your lender. This can be particularly attractive if the interest rates are very low to start with. If the interest rates are higher, another advantage is that your payments will go down with an interest reduction, which you will not get if you are on a fixed rate mortgage.
There are disadvantages to a discounted variable rate mortgage, and that is all to do with the fact it is variable. If there is a sudden interest rate rise you can find yourself facing a sudden rise in mortgage payments that you hadn’t necessarily planned for. Therefore if you require repayment stability you are likely to find that a variable rate mortgage will not provide you with the stability you need.
Therefore, consider current interest rates and what will happen if they go up or down in order to decide whether a discounted rate mortgage is the one for you.
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