Discounted rate mortgages
If you need to save money in the first few years of your mortgage then a discount rate could be the way to go.
Discounted rate mortgages give exactly what they say a discount on the lender's Standard Variable Rate (SVR) Mortgage. For example, a mortgage lender may offer a 2% discount on its SVR mortgage for two years. With an SVR of 6%, this would make your mortgage rate 4%.
Discounted rates are of course variable as they are linked to the SVR, which is in turn set by the base rate. This means should the base rate fall, the SVR mortgage will quickly follow suit, meaning a decrease in your monthly mortgage payments hurrah! Unfortunately, should they rise the opposite will occur, leaving you out of pocket. Lenders also tend to be pretty hot at implementing an SVR rise, but can let many months elapse before applying a cut, meaning that you won't benefit straight away.
This type of mortgage is therefore not for those on a tight budget as your mortgage payments could potentially vary quite a lot. However, if you've a little more money to spare and rates are low, or predicted to go down, snapping up a good discount deal could save you some money. And if you avoid any extended tie-ins you can simply re-mortgage at the end of the mortgage deal.
Length of discount
Consider how long the mortgage discount is offered for (typically 2,5 or 10 years). If rates are low, you could benefit from reduced mortgage payments for a while at least.
Mortgage redemption penalties
Again, like fixed rate mortgages, discounted mortgages tend to have redemption penalties should you try and switch mortgage or pay it off within the discounted period, you'll be slapped with a hefty fee. You also need to watch out for those extended tie-ins.
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