Discounted Rates

The Basics

Lenders offer you the option to reduce the interest rate applied to your loan by a set percentage. The reduction will be directly linked to the lender’s variable rate, and will usually apply for the first few months or years of your mortgage term. Increases in the mortgage rate will therefore affect your loan although the discount will still apply until the end of the agreed period. Bigger discounts are frequently offered if a larger deposit is being provided by a borrower, and to those taking out larger loans. Certain lenders will include some element of cashback. Usually the loan will stipulate that the borrower will be penalised should he transfer the mortgage or repay part of the loan early for a set period.

Advantages

Reducing the monthly costs at the outset allowing other costs associated with house purchase to be catered for in the early months or years. Allows borrower to take advantage of rate reductions, as the discount will be applied to the newly reduced variable mortgage rate.

Disadvantages

Once the discounted period expires the rate returns to the variable, meaning an increase in the monthly cost – Larger discounts lead to larger increases. Incorporated redemption penalties can be restrictive. Exposure to interest rate rises.

Suitability

A discounted rate mortgage is the most suitable option in a number of circumstances the most common being those identified below:

• Individuals on tight budget expecting wage increases over the first few years of the mortgage