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What is a discounted mortgage?

Category: Mortgages
Author: Tim Leonard
Updated: 23/11/2018

Discounted variable rate mortgages offer a discount on a certain interest rate, most commonly a lender's Standard Variable Rate.

The discount can be for an introductory term of two, three or five years, or it could even be for the entire term of the mortgage (a lifetime discounted rate).

How does a discounted rate mortgage work?

A discounted rate is a type of variable interest rate – so your payments can go up and down. They work by offering a set discount on a lender's Standard Variable Rate (SVR).

So, if the lender's SVR is currently 5.00% and the discounted rate offers a 1.00% discount, you'll initially pay 4.00%.

Discounted mortgage rates

Then, if the SVR goes up to 6.00% at a later date, your discounted rate would go up to 5.00%. If the SVR goes down by 1.00%, your discounted rate would also go down by 1.00%. To find out when a lender may increase or decrease their Standard Variable Rate (and therefore any discounted rates linked to it), our SVR guide.

When your introductory period comes to an end, you will most likely go onto your lender's Standard Variable Rate properly.

Discounted rates tend to come with an Early Repayment Charge, if you pay off the mortgage early or remortgage to another lender during the introductory period. However, most will let you make overpayments – normally up to 10% of the outstanding balance per year.

If you have a lifetime discounted mortgage, the Early Repayment Charge will probably not apply for the full term of the mortgage, but only for an initial two to five-year period (depending on your lender).

Although discounted mortgages may sound like a good deal, they're not necessarily the cheapest mortgage rates you can get – you may be able to find a cheaper tracker mortgage, for example. And remember, discounted mortgages have variable rates, which means you won't get the same payment security as you do with a fixed rate.

Some discounted rates can only go so low

Discounted mortgage rates dip

Collar rates are becoming more common since interest rates hit all-time lows.

They basically mean that the mortgage rate, and therefore mortgage payments, can only go so low.

So, if a Standard Variable Rate was reduced to a level that sent the discounted mortgage below the collar, your payments would not go any lower than the collar rate.

Discounted mortgages: advantages and disadvantages

When interest rates are low, your payments will be lower If interest rates go up, so will your payments. An increase of just 1% could add an extra £83 a month to your repayments for a £100,000 mortgage
Discounted rates can have quite low mortgage arrangement fees in comparison to a fixed rate or tracker Although they have the word "discount" in the title, discounted mortgages may not be the cheapest rates on offer

Some discounted rate mortgages have an interest rate collar, which means that your payments can only go so low

What next?

Search all mortgages

Compare the best discounted variable rate mortgages

Speak to an independent mortgage adviser

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.