A Guide to Mortgages Part 3

by Mark Johnston

Borrowers have to pay interest on any debt and mortgages are no different!

The discounted rate mortgage:

A discounted rate mortgage is usually aimed to attract new customers such as first time buyers; this is because it gives them a little breathing space at the start of the mortgage term. This can help them to recoup money they may have paid out on fees and solicitors.

The lender offers a discount on the standard variable rate (SVR) for a specific length of time, usually between 6 months to 3 years, although longer terms can sometimes be arranged. The general rule of thumb however is the larger the discount, the shorter the term.

An example of how a discounted mortgage works 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.

The discounted rate mortgage can also carry hefty penalties if a borrower wanted to pay off their mortgage early or wished to switch to a new deal with in their term.

The capped rate mortgage:

Capped rates are some what a less understood concept, but the capped rate mortgage was once quoted as a ‘having your cake and eating it’ kind of deal.

A capped mortgage is a blend of a fixed rate mortgage, a standard variable rate (SVR) mortgage and a tracker mortgage.

With a capped rate the rate will still rise and fall in line with the lenders standard variable rate (SVR) but it will never rise above the ‘cap’, which is set at the start of the mortgage term and remains the same through out.

If the lenders standard variable rate (SVR) falls below the cap then the borrower will benefit from this with lower monthly payments. If the standard variable rate (SVR) then rises above the cap then the borrower will go back to paying the capped rate.

Many capped rate mortgages will also have a fixed minimum rate they can fall to, this is usually known as the ‘collar’.

The advantage of this mortgage is that they are again good for budgeting and also the tracker element of the mortgage can allow the borrower to benefit from low interest rates.

However there is generally not a lot of choice for capped mortgage products with in the mortgage market and they are also usually less competitive than the fixed rate or variable rate mortgage.

Yet again an early redemption charge may apply to these mortgages and also once the capped rate period ends the mortgage will revert back to the lenders standard variable rate (SVR)

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