Discounted Rate Mortgages

A compromise between fixed and variable-rate mortgages.

In a Nutshell...

• You get a discount to the lender's standard variable rate for a set period, which can range from 6 months to more than 10 years.
• The interest rate is variable and changes with the standard variable rate.
• Stepped discounts mean that the rate is gradually increased until the end of the discount period, when it reverts back to the standard variable rate.
• The fees and charges are less than for a fixed rate mortgage.

What is it?

With discount mortgages, lenders offer a discount off their standard variable rate for an initial period, which then reverts to the standard variable rate when the set period ends. This has the effect of making mortgages appear more affordable when you've just bought the property.

Taking an example of a lender which has a standard variable rate of 6.5%, a 2 year discount of 2% would mean you would pay 4.5% for the first 2 years. If interest rates went up, the lender's standard variable rate would probably also go up, and with it your discounted rate. The same would happen if interest rates fell.

As with fixed and capped rates, the discount period can last from 6 months to 5 years to the whole length of the mortgage. Some lenders will offer a stepped discount, which means that rather than the payments jumping back up when the discount period ends, the size of the discount decreases over a set period. For example, the discount could be 2% in the first year, dropping to 1% in the second, and then 0.5% in the third. This gives you time to make changes to the way you budget your outgoings.

Costs and charges

• Costs: The fees on discounted rate mortgages are generally not as high as for fixed rate mortgages, as the risk to the lender is lower.
• Early redemption charge: Discounted rates often come with tie-ins or charges if you want to move or change your mortgage before the end of the discount period. It's normally only worth paying these if you can make equal savings by switching mortgages.
• Overhang periods: Also make sure you know whether there is an overhang period - a period after the end of the discount period, where any early redemption charges still apply.

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