Discounted Mortgage

by Mark Johnston

In our final article in a series looking at mortgages available in the UK look at discounted mortgages. Recently we looked at standard variable mortgages and how they were calculated they seem to be full of ifs and maybes everything seems to rest on the Bank of England base rate whether it rises or falls. Today it is the turn of the discounted mortgage this is a special discount on your interest rate over a specified period of time to try to attract new customers.

A discounted mortgage is usually aimed at young professionals wanting to get a foot on the housing market re mortgaging, first time buyers, this discount seems to be popular as it gives borrowers a little breathing space at the start of the mortgage to  recoup the money on fees and solicitors etc also helps a little with the furniture home improvements and fittings for their new home.

Basically a discounted mortgage is a guaranteed fixed percentage off lenders standard variable rate over a specified length of time, which could be six months two year three year or longer deals can be arranged.

This is an example to show how the discount works A lenders standard variable rate is six percent and the borrowers discount is two percent the interest that would be paid by the discounted borrower is four percent while the existing borrowers would pay six percent.

Some lenders have a stepped discount mortgage this means the discount changes at one or more set times along the term of the discount period, which could be three percent discount in first year, two percent discount in second year and one percent discount in third year.

Generally the rule of thumb the larger the discounts the shorter the term. Usually the discounted mortgage requires a loan to value (LTV) of sixty percent or

The discounted mortgage is influenced by the bank of England base rate so if the rate increases by one percent the lenders standard variable rate increases by one percent but also does the borrowers increase by one percent.

The lenders standard variable rate (SVR) tends to move up and down with the Bank of England base rate but in fact the lender can change the interest rate of his own standard variable rate himself which influences the borrowers lenders can do whatever they want they want with their standard variable you have no guarantee on what will happen. Of course competitive pressure and in recent times the government and press scrutiny over this point seems to show that it moves in the same direction as
the bank of England base rate but not by necessarily by the same amount.

The interest rates are likely to fluctuate on a discounted mortgage but buyers who are looking for asset budget each month may not be suited to this kind of mortgage.

You will have to pay a hefty penalty if you want to pay off your mortgage early or switch to a new mortgage deal within the term.
After the initial term is over your interest rate will go back to the lenders standard variable rate.
Refinancing after the initial period is over usually has no penalties the point to re financing at this time is to potentially lock in on another discounted period this will in turn save money

This seems to be a good mortgage to ease young first time buyers into buying a house but for the short term period as although bank of England base rate will not stay low forever if you have just locked in for a discounted period and the base rate increased a few points you have got problems.

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