Discount Rate Mortgages - Pros and Cons
Mortgage Comparison Sites and Getting the Best Rate of Interest
Dec 12, 2008
Discount rate mortgages are a way of attracting and facilitating first time buyers. The rate of interest offered is discounted meaning that, if the Standard Variable rate (SVR) is 5%, a mortgage discount of 1% for 2 years would mean that a borrower only pays 4% interest.
Advantages of Discount Rate Mortgages
- Reduced monthly interest rates and mortgage payments. The borrower will pay a rate of interest that is set below the normal SVR.
- Choose a short or longer discount period. A larger reduction for just 12 months can be useful to first time buyers who want to spend the additional money buying new items for the home. The longer the discount lasts, the smaller the reduction will be.
- Benefit from base rate reductions. If the Bank of England reduces base rates, these are likely to be passed on to the borrower.
Disadvantages of Discount Rate Mortgages
- Redemption penalties. On the more favourable discounted deals it is possible that a borrower will be tied in for longer than the deal lasts for. If the borrower wishes to move mortgage prior to the end of the tied-in period, a redemption penalty will be applied.
- Increased volatility. Changes to interest rates made by the Bank of England will affect monthly mortgage repayments.
- Make sure that mortgage payments can be afforded once the discount period ends. The discount period will normally only last for 1-2 years. Once it ends, it is important to be able to afford the new repayments that come into effect.
- Some discounted rates have a collar. It is important to check the T&C's to see if a collar exists. This means that there is a restriction in terms of how much rates can be reduced by.
- Moved to Standard Variable Rate at the end of the term. The borrower will be moved to SVR which means that Bank of England base rate plus 2% is normally paid.
Use a Mortgage Comparison Service
A mortgage comparison service or mortgage broker can assist a first time buyer in terms of identifying the right mortgage product. The T&C's all vary considerably between products and an in-depth knowledge of the specifics of individual products is imperative.
Discount rate mortgages can be a useful way for a first time buyer to get on to the property ladder, particularly if incomes are expected to grow in a couple of years time. It is important to always be financially prepared for interest rates increasing after the discounted period elapses. Failing to do so may result in financial difficulties.
Those who are interested in reading about discount rate mortgages may also wish to look at Fixed Rate Mortgages - Pros and Cons and Standard Variable Rate Mortgages - Pros and Cons.
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