UK Discount Mortgages - Mortgage Advice

What are discount mortgages?

A discounted rate mortgage guarantees that you will pay a set amount below a lender's standard variable rate for a specified period of time. Whilst the standard variable rate goes up and down, the discount will remain fixed.

You can get a discount mortgage lasting from as small a period as six month up to about five years. In general, the shorter the period of the discount, the higher the discounted rate will be. So, for example, if you have a two year discount, you may get a discount of 1% of the standard variable rate, but a one year discount could be 2%.

Discounted mortgages are recommended for people who prioritise keeping their initial payments as low as possible. Perhaps because it is their first mortgage and their income isn't so high and they want to have some spare cash to spend, perhaps on furnishing their home or on car repayments. The discount period can help you achieve this.

Discount mortgages are excellent for people who are happy to play the system. You should find out whether there will be redemption penalties for changing mortgage after your discounted period has ended. If there isn't, it may benefit you to wait until the end of the discount period then move to another discounted mortgage, hopefully with no overhanging redemption penalties. After that one, you could move again. In fact, assuming the mortgage market stays the same, you may be able to benefit from discounted mortgage for your whole mortgage term.

You should note that if you don't remortgage, and you do nothing after the pre-determined discount period, you will go back to the standard variable rate

Discount mortgage are very popular, in fact, 60% of new mortgage or remortgages taken out in 2000 were discount mortgages, and almost every provider offers a discount deal. It's perhaps not surprising, when you consider that there are millions of people paying over 7% for their mortgages, it's not surprising that when offered a pay rate of under 4% people will take a discounted mortgage.

So why do lenders offer these discounts, when the payable rate is lower sometimes than the bank of England base rate, or more importantly, lower than the savings rates that they offer? Well, quite simply, it's a marketing ploy. It's no different to any other sales promotion offered by any retailer. They are allowing you to buy the same product but at a discounted price, so that you become their customer. Once you are their customer, they can make it difficult for you to leave, with redemption penalties, and they also have your complete attention and can work on marketing to keep you as their customer.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2009

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