> Discounted Variable Rate - UK Guide
In a nutshell
A discounted variable rate is a mortgage that gives you a percentage discount off the lender's variable rate for a set period of time.
Best Mortgage For
First time buyers or those people switching deals or lenders who want a discounted rate in the hope that interest rates will drop in their favour.
This type of option is always offered as a variable deal. Here you will be committing to the lender's variable rates but, for an initial period (usually between 1-5 years), you'll be getting a discount. So, for example, if your discounted variable rate is 3%, you'll be paying 3% less than the lender's standard variable rate. This won't necessarily result in fixed repayments as it will track the actual variable rate which, as the name says, will vary according to market conditions. At the end of your deal period, you'll most likely be switched to the standard variable rate. But some lenders offer discounted tracker options as well.
Typical Amount to borrow
You'll probably be offered standard borrowing terms here (up to 3-4 times your own salary or 2.5-3 times you and your partner's salary). It is possible to arrange to borrow higher amounts but you will probably have to pay higher rates to get this. Some lenders will let you borrow up to 100% of your property's value and some will even consider letting you borrow more.
You can borrow up to 100% with this kind of deal. Deposits here will be as standard and will start at 5% of the property value. You'll get better rate deals in most cases if you put down a higher deposit.
Discounted variable rates can offer a good short-term solution as they'll keep your repayments down for the first few years of your mortgage. This can help you cope with the expenses of setting up a home and making any necessary changes. They can also work well if interest rates drop and are best used to combat high interest rates - it's at this point that some of the best discounted deals are released.
What to look out for
This type of deal can give you quite significant discounts and, as a result, you might face large penalties that last for lengthy periods from your lender if you try to redeem your mortgage or switch deals early. A discounted variable rate can work really well for you if interest rates drop low but can work less well overall if they rise. It might be better to take out a discounted rate tracker deal than one that follows your lender's own variable rate. Lenders don't have to change their variable rates when bank rates change to pass on savings but they do have to change tracker rates. So, with a tracker you'll stand a better chance of maximising any savings to be made.
A fixed rate deal might suit you better depending on how the base rate looks when you take out your mortgage.