What are discounted rates?

A discounted rate is a set deduction off the lenders standard rate for a certain period of time. When the standard rate goes up, your rate will go up, and when the standard rate goes down, so too will your rate. For example, a 4% discount off a 7% standard rate leaves you paying 5%. However, if the standard rate rises to 8%, you pay 6%. If it falls to 6% you pay 4%.

Discounted rates often differ from a few months to as long as 25 years, although the majority of deals are between 2 and 5 years. It is often the case that the shorter the period, the larger the discount. Once the discount period has finished, you will usually revert to the lenders standard rate. Some deals even offer a stepped discount, where for example 6.5% is of the discounted rate for a year, then 1.0% discount for over 3 years.

The Advantages of A discounted rate.

1. In general, the deals come without any fees, such as arrangement fees and brokers fees.

2. Discounts enable you to benefit from any lapse in your lenders standard rate.

3. Discounts can keep your payments low in the early years, which is extremely useful when finances can be particularly stretched at first, due to the cost of moving and home improvments etc.

4. Interest rates are usually lower than fixed and capped rates of a similar length of time.

The Disadvantages of A discounted rate.

1. Most importantly, if interest rates rise, so will your monthly repayments.

2. The deals with the biggest discounts have the biggest catch; they often require fees, such as brokers and arrangement fees.

3. If you pay off your mortgage early, you will often be faced with an early repayment charge, sometimes in the region of hundreds, even thousands of pounds!

4. Once you come to the end of a heavily discounted deal, over a short period of time, you may suffer payment shock when you suddenly realise that you face much higher repayment bills at the end of the deal.

5. Your standard rate is affected by what the lender does to its standard rate, so many find that they rarely hear about falls in the Bank of England base rate, which would be most helpful, but bombarded with increases in their standard rate.