Best Discounted Variable Rates

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How does a discounted rate mortgage work?

A discounted rate mortgage uses a variable interest rate – so your payments can go up and down. They work by offering a set discount on a lender's SVR. So, if the lender's SVR is currently 3.00% and the discounted rate offers a 1.00% discount, you'll initially pay 2.00%.

Then, if the SVR goes up to 4.00% later, your discounted rate would go up to 3.00%. If the SVR goes down by 1.00%, your discounted rate would also go down by 1.00%. To find out when a lender may increase or decrease their SVR (and therefore any discounted rates linked to it), see our SVR guide.

When your introductory period comes to an end, you will most likely move onto your lender's SVR. Discounted rates tend to come with an early repayment charge, if you pay off the mortgage early or remortgage to another lender during the introductory period. However, most will let you make overpayments – normally up to 10% of the outstanding balance per year.

If you have a lifetime discounted mortgage, the early repayment charge will probably not apply for the full term of the mortgage, but only for an initial two to five-year period (depending on your lender).

Although discounted mortgages may sound like a good deal, they're not necessarily the cheapest mortgage rates available. For example, you may be able to find a cheaper tracker mortgage. Remember: discounted mortgages have variable rates, which means you won't get the same payment security as you do with a fixed rate.

Some discounted mortgage rates can only go so low

Collar rates are becoming more common since interest rates hit all-time lows. These basically mean that the mortgage rate, and therefore your mortgage payments, can only go so low.

So, if a lender’s SVR was reduced to a level that sent the discounted mortgage below the collar, your payments would not go any lower than the collar rate.

Pros and cons of discounted mortgages

  • When interest rates are low your repayments will be lower.
  • Discounted rates can have quite low mortgage arrangement fees in comparison to a fixed rate or tracker.
  • Your interest will track against your lender’s SVR, meaning if this increases so does your monthly payment.
  • If interest rates go up, so will your payments. An increase of just 1% could add an extra £83 a month to your repayments for a £100,000 mortgage.
  • Although they have the word "discount" in the title, discounted mortgages may not be the cheapest rates on offer.
  • Some discounted rate mortgages have an interest rate collar, which means that your payments cannot go below a certain point.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

Check carefully as to what, if any, collar rate applies to your discount mortgage and for how long.

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Read our How much can I borrow for a mortgage guide to find out more about what can impact your potential sum of borrowing.

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