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Complete Guide to Mortgages |
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Discount Mortgages
Attract borrowers
with their 'buy now pay later' appeal. Lenders offer an
initial discount off their standard variable rate (SVR),
which then reverts to the SVR once the set period of
discount is up. In a period of low interest rates, this
can have the effect of making a large mortgage look
affordable.
A 2% discount on a lender's SVR of 5.75% means
that you would pay interest at a rate of 3.75% for the
period of the discount - but only as long as the SVR
stayed at 5.75%. Your mortgage rate will stay 2% below the
SVR but if interest rates rise and the lender's rate with
it, your payments will also increase. And your rate will
revert to the now higher SVR once the discount period
ends.
Equally, of course, if rates fall, your repayments will
too. This is why discount mortgages can be a gamble and it
is up to you to judge how comfortable you feel with a
variable rate.
Discount
length
Discount mortgages vary in length from under a
year to 10 years to term discounts. Deciding how long a
period to opt for will depend on how confident you feel
about interest rates - if you're unsure don't choose more
than a two or three-year deal. Taking a two-year discount
will allow you to enjoy the benefits when rates are low
but also to reassess the situation after a short period of
time.
Stepped
discount
One problem with discount mortgages is that at
some point the discount will end and your payments
increase to the standard rate. If you were enjoying a
substantial discount this can mean a sudden hefty rise in
your mortgage repayments. A stepped discount can help to
soften the blow by reducing the amount of the discount
over a certain number of years.
For example, you might start with a 2% discount, falling
to 1 % after one year and to 0.75% a year after that. In
this way you are forced to budget for more gradual
increases to your mortgage payment rather than facing a
shock at the end.
Who
benefits?
If you have to budget, a discount mortgage
probably isn't the ideal choice for you. This is likely to
include first time buyers but the initially low rate of a
discount mortgage can provide much needed extra cash for
other expenses incurred when buying a home for the first
time - such as furniture and kitchen and bathroom
essentials. You must be prepared to take on a certain
amount of risk, however.
Discounted mortgages are most suitable for those people
who are looking for the cheapest initial payments at any
given time, but can afford any increased payments if
interest rates begin to rise. Likewise if you believe that
interest rates are likely to fall, or at least stay
stable, a discounted mortgage makes continuing reductions
to monthly repayments possible.
Fees
and penalties
Discount mortgages frequently come with
penalties or tie-ins that prevent you from remortgaging or
redeeming the loan for a set period of time. They're not
usually as severe as fees associated with fixed rates,
however, because variable rates present less risk to
lenders. If you need to move home or wish to increase
payments during the discount period, however, this can
prove expensive.
Also, some lenders extend the tie-in period beyond the
introductory deal with an overhang period. This is an
early redemption charge that lasts beyond the discount
period. There are discounts without redemption charges,
but inevitably they have much less attractive rates. It is
a question of weighing up your needs to see which works
best for you.
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