A discounted rate is like an introductory offer for your mortgage. When you remortgage, you can get a discounted rate even though you might have had one before. Discounted rates could make your mortgage much cheaper.
When you take out a credit card, you’ll usually be given an interest-free period to start. In fact, many financial products have introductory rates for new customers. Mortgages are no exception. A discounted rate mortgage has a lower starting rate, so you’ll enjoy reduced interest charges.
Your discounted rate will apply for some time before your interest rates are increased.
Read on to learn more about discounted rates and how you can remortgage to get them.
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A discounted rate is an introductory offer, meaning that you’ll pay lower interest rates with your new mortgage. After a while, the discounted rate ends, and your mortgage costs will suddenly increase. Usually, a discount rate is applied to a mortgage for the first 1-2 years.
Discounted rate mortgages can be amongst the cheapest. These mortgages are typically variable mortgages, so your payments might change every month, though you’ll usually pay less than you’d pay for your mortgage on the Standard Variable Rate.
If you’re remortgaging, you might mistakenly think that you won’t be entitled to a discount. In fact, remortgages act like new mortgages, so you can take advantage of these offers. You can remortgage to a discount rate with a different mortgage provider, or might even be able to ask your current lender to give you access to these deals.
Remortgaging to a discounted rate can help you to save a lot of money. Many people choose to remortgage when their discount runs out, finding another discounted rate mortgage so that they’re never paying full price.
If you’re remortgaging to a discounted rate, check how long it’ll apply for. Most of these mortgages have very short discount terms, usually one or two years, so the savings and benefits can quickly come to an end.
Remortgaging yearly isn’t all that practical, so you might decide that a discounted rate doesn’t last long enough for you. Usually, when these rates run out, you’ll be transferred to your lender’s Standard Variable Rate, which can be a lot more expensive.
You might decide that a discounted rate isn’t worth the effort of remortgaging and that you’ll save more time and money by choosing a different option. When deciding how to remortgage, consider the associated costs and fees to see if they wipe out the benefits.
Discounted rates are tempting, even to those with previous experience of managing monthly mortgage payments. These discounted rates are often very competitive, appealing to your money-saving nature. If you can find a way to remortgage quite cheaply, the savings you’ll make could be worth it.
Be aware of how short these mortgage terms are. Discounted rates might only last a year, so you’ll need to remortgage again. There are fees and costs that you’ll be paying every time you remortgage, so you’ll need to consider that you could be remortgaging twice in just over a year. Remortgaging can become expensive, as well as being time-consuming and requiring plenty of admin.
If you don’t remortgage a second time, you’ll be moved to your lender’s Standard Variable Rate. These are often the most expensive mortgages. Spending months on an SVR mortgage could soon wipe out the savings you made by choosing a discounted rate.
Whilst discounted rate remortgages might sound appealing; you’ll have to weigh up the financial costs and savings and can’t easily take a back seat. You won’t have much time to rest before your discount rate comes to an end.
As well as having to factor in the costs of remortgaging twice in quick succession, you’ll also need to be aware of the tactics that are used for mortgage marketing. It can be difficult to compare the costs of mortgages to each other or to your current payments.
The key to finding the best-discounted rate mortgage is not to fixate on the discount. Alone, this information isn’t useful. A big discount doesn’t mean a thing if the starting rate was higher than most. Sometimes, a lower interest rate with a smaller discount is cheaper than a deal that sounds better.
When you’re comparing discounted rates for remortgaging, pay close attention to the actual rates you’ll be charged. Don’t be swept up by marketing campaigns that focus entirely on the discount.
For this example, we’ve chosen a typical fixed mortgage rate at the interest rate of 2% versus a mortgage that is discounted to 1% before rising to 4%. This is on a £100,000 repayment mortgage for five years.
|Mortgage||Monthly Repayment||The amount repaid (of debt) after 5 years||Interest paid after 5 years|
|Fixed rate - 2%||£424||£16,212||£9,228|
1% for 24 months
4% for 36 months
|£377 for 24 months
£515 for 36 months
Numbers compiled by Money Savings Advice
The discounted rate looks amazing upfront - £50 cheaper a month is a huge amount for most customers. But over the full term, you’re actually paying a lot more and paying over £3,000 extra in interest. This is why you need to be careful.
Not all discount rate mortgages are this unfavourable, but it gives an example of why you must check the full terms of the mortgage you’re being offered.
Fees and charges aside, discounted rate mortgages are often the cheapest variable mortgages you’ll find. Of course, they’re appealing to everyone, from first-time buyers right through to customers remortgaging to get a better deal.
You should look at discounted rates for remortgaging, just to see what options are available. A good discount, and a low rate, could make remortgaging your property worthwhile. Just make sure that the savings are big enough to make remortgaging worthwhile.
If you know you’re remortgaging anyway, there’s a good chance that a discounted rate is the best option you’ve got. If you don’t need to remortgage, carefully consider if it’s really worth moving at all.
Many discount rate mortgages come with collars and caps. If you’re remortgaging to a discount rate deal, make sure you check if these are applied.
A collar stops your interest rate from dropping too low, so it limits the savings you’ll make. A cap stops your interest from rising too high, so could protect you from paying too much. Mortgage caps can work in your favour, though a collar might mean that you can’t take full advantage of everyday interest fluctuations.
Check where the collars and caps have been set, to see if they’ll cause you any problems. Lenders are most likely to set their collars relatively high and their caps relatively low since this helps them to maximise their profit.
It can be difficult to calculate discounted rates and see what deal you’re really getting. With collars and caps, discounts and standard interest rates, there are many different factors to consider. Your monthly payments can go up and down, changing several times in one year, so you’ll need to take an active approach to manage all your mortgage paperwork.
Remortgaging is a big decision that could go one way or the other. Many people save money by remortgaging, though one small mistake could wipe out any savings or mean you’re paying more for your property.
Here at Money Savings Advice, we have partnered with some of the UK’s leading mortgage brokers. They have already helped thousands of people get the best remortgage deal and they can do the same for you.
Choosing an independent adviser means they won’t recommend a mortgage unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
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