A discounted mortgage offers a discount on a specific interest rate, generally the Standard Variable Rate (SVR). For some borrowers, this is a cost-effective option, especially while interest rates are low.
However, there are some disadvantages to consider, and advice should be sought from a mortgage advisor, as they have taken a CeMAP training course and have extensive knowledge of the different mortgage types.
The discount may be offered for a specific period of time, or may even be offered for the whole mortgage term. A discounted mortgage interest rate is variable, which means that payments may increase or go down, depending on the SVR at the time.
They work by giving a set discount on the SVR charged by the lender. If the SVR goes up, payments will go up, and if the SVR drops, so do your payments. If you decide to switch to another lender, or repay the mortgage, the lender will usually levy an Early Repayment Charge. If you are on a lifetime discounted mortgage deal, there will usually be a set period where the Early Repayment Charge will apply.
While interest rates are so low, a discounted mortgage can be a good deal. However, if interest rates increase, you may find that a fixed rate deal will be cheaper. A fixed rate mortgage will also offer security if interest rates increase, as you have fixed payments for a set period. Discounted mortgages may not be the cheapest option, so it is important to consult an advisor before signing up to a deal.
