Mortgage lenders will typically offer a range of different mortgages to choose from. Broadly, these fit into two categories. A fixed-rate mortgage has interest rates locked in for several years, whilst a variable rate can fluctuate and change month by month.
Lenders typically offer a standard variable rate that’s comparatively expensive, along with a discount rate that can help you to save money in the early years.
Discounted rate mortgages are variable mortgages with temporarily reduced interest. For a short time, usually a term of around two years, they’re cheaper than a mortgage lender’s standard variable rate, but after this your payments will increase.
Discount rates won’t last for long, usually a couple of years at most, before you’ll be shifted to the standard variable rate.
Read on to learn more about discount rate mortgages, explained in our discount rate mortgage guide.
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When you apply for a new credit card, the lender will entice you with a deal. Usually, this is 0% interest for a short amount of time. Once your interest-free period comes to an end, your borrowing gets much more expensive. Mortgages can work in the same way, with a low rate to tempt new borrowers.
When you choose a discount rate mortgage, pay attention to how long it will last. Usually, the discount is only applicable for the first year or two. In some cases, discount rates can be applied for much longer.
When you’re on a discount rate, your monthly interest is lower than it otherwise might be. Once your discount rate period comes to an end, it’s likely to rise a lot higher. Usually, once your discount rate mortgage term finishes, you’ll move to a standard variable rate.
The standard variable rate is typically one of the most expensive mortgages offered, though your mortgage lender hopes that you’ll be feeling too lazy to look for alternative options.
Whilst you have a discounted rate mortgage, you’ll probably enjoy a great price. Like with other tracker mortgages, your monthly interest rates can rise and fall to change your monthly payments.
Fluctuating interest rates can work in your favour or make your mortgage more expensive, though when you’re on a discount rate, you might struggle to find better deals elsewhere.
Whilst fluctuating interest rates might work in your favour, this isn’t always the case. In times of high interest, unpredictable payments might be more of a hindrance than a help. Variable mortgages come with uncertainty, making it difficult to budget.
Once your discount rate mortgage term ends, you’ll need to be prepared for significantly higher interest rates. Lenders are unlikely to make you aware of better deals you could be getting, so when you know your mortgage term is reaching its end, it’s time to start shopping around.
You can look for a fixed-rate mortgage or a better variable deal, with no need to automatically settle on the lender’s standard variable rate.
The below example shows what a £150,000 mortgage would look like over a 25-year borrowing term with a 1% discount applied.
|Interest Rate||Monthly Repayments||Total Paid within 2 years||Of which is Interest|
|Standard Variable - 3%||£711||£17,064||£8,754|
|Discount (1%) - 2%||£636||£15,264||£5,828|
Numbers compiled by Money Savings Advice
Taking just that one percentage point off your interest rate makes a massive difference within the first two years. You’d pay less each month, and significantly lower interest, meaning more of your money is going towards paying off your debt.
Always look for the best-discounted rate, and evaluate all the options available for your loan to find which one is most suitable for you.
It’s tempting to look for the discount rate mortgage that offers the biggest savings. A large discount looks appealing but isn’t what you should focus on. When you’re choosing a mortgage, you need to consider the standard rate charged by the lender.
Remember that a discount is an amount that’s taken off the standard rate a mortgage lender charges. If their standard rate is particularly high, even a great-sounding discount might not make the deal worthwhile.
You’ll need to do a few calculations. With the discount taken off the standard rate, how much are you really being charged? Could another lender with a smaller discount actually offer cheaper mortgages?
If you’re looking for a variable mortgage, it’s sensible to look at discount rates. With these, you can reduce your interest, just for a year or two. Getting a discount, of course, is better than missing out on savings. The key is to find the best rate once a discount’s been applied.
Even the longest discount rate mortgages don’t often last for more than five years. You’ll need to consider your next step once your discount rate comes to an end.
Discount rate deals might sound too good to be true. If interest rates drop, your discount could mean that you’re paying a very low interest rate. To protect their interests, most lenders have a discount rate collar.
A collar is a minimum interest rate that you’re going to be charged. If the standard variable rate drops too low, the discount you’re receiving will temporarily be reduced. By setting a collar, mortgage lenders can be sure that you’ll never pay less than they want you to. They have their lower limit, and your discount is adjusted to make sure that you don’t go beyond this.
It’s worth checking the terms of your discount rate mortgage to see if a collar’s been set. This will show you the absolute lowest interest rate you’re going to be charged.
The opposite of a collar, an interest rate cap is the highest interest rate you’ll be charged. This can be reassuring, though you’ll typically find that caps are set at very high levels. Though you won’t be charged more than the capped interest rate, you could still be charged a lot before you reach it.
Many mortgages don’t come with interest rate caps. Before you borrow, see if yours does.
Discount rate expiry is the biggest risk that you’ll take with a discount rate mortgage. Life can get busy, but if you lose track, you could find that you’ve missed the discount ends. Your interest rates might suddenly increase to the standard variable rate.
Fortunately, most standard variable rate mortgages don’t come with exit penalties. They’re usually flexible, so you can still make a move to a mortgage that better suits your needs.
If you feel that a discounted rate mortgage is the best choice for you, the first step is to shop around and speak to a range of mortgage lenders. Don’t get drawn in by the discount alone, but remember to consider the original rate that the discount is being applied to. A bigger discount isn’t always better.
Once you’ve chosen a discount rate mortgage, always stay on top of the admin. Your monthly payments might jump up and down, with the end of your discount term being even more problematic. Don’t be a passive homeowner, allowing yourself to be moved to a Standard Variable Rate mortgage.
Take some time to consider your next steps just before your discount rate comes to an end.
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