Discounted mortgages
Discounted mortgages are usually aimed at attracting new mortgage customers such as first time buyers. The lender offers a discount on the standard variable rate (SVR) for a specific length of time. The time period is usually between 6 months and 3 years however some lenders will sometimes agree longer discounted periods. In general, the rule of thumb is the larger the discount, the shorter the term.
Discounted rate mortgages can be popular with first time buyers because, the discounted period offers the new home-owner a little breathing space at the start of the mortgage term. The discount often helps buyers recoup money paid out on fees and solicitors.
An example of how discounted mortgages work is as follows:
A lenders standard variable rate (SVR) is 6% and the borrowers discount is 2%, therefore the interest paid by the borrower would be 4%.
These mortgages are usually influenced by the bank of England’s base rate, therefore if the rate increases by 1% and the lenders standard variable rate (SVR) increase by 1%, so does the borrowers discount and of course vice versa.
Potential borrowers, who are looking to be able to budget every month, may not be suited to this type of mortgage. Discounted mortgages can also carry a penalty if a borrower wants to pay off their mortgage early or wishes to switch to a new deal with in their term.
