Discounted Variable Rate Mortgages

Your home may be repossessed if you do not keep up repayments on your mortgage

What is a discounted variable rate mortgage?

Mortgage lenders have a standard variable interest rate, which is based on the Bank of England’s base rate and their own costs.

If you have a discounted variable rate mortgage, your interest rate will then be set at a fixed percentage below the standard variable rate.

How do discounted variable rate mortgages work?

If the mortgage provider’s standard variable rate was 4.99%, and the deal’s discounted variable rate was set at 1% below it, your interest rate would be 3.99%.

The standard variable rate can change, though, which means the amount of interest you pay on your mortgage repayments could also change. But the interest you pay will always be charged at the agreed fixed percentage below the standard rate.

So if the lender’s standard variable rate changed to 5.99% and your agreed discount was 1%, you’d be charged interest at 4.99% on your mortgage repayments for however long the standard rate is set at 5.99%.

How long does a discounted variable rate mortgage deal last?

Discounted variable rate mortgage deals usually last between two to five years. How long your deal lasts will be based on the current deals mortgage providers are offering, as well as your financial situation and credit history.

Once the deal ends, you’ll be moved to the mortgage provider’s standard variable rate – which will be higher. This is when you can look to take out a new discounted variable deal, or fix yourself with a different low-rate deal, either with the existing lender or a different company.

Advantages of a discounted variable mortgage

A discounted variable mortgage offers advantages such as:

• A lower interest rate than the mortgage provider’s standard variable rate for the duration of your deal
• The possibility of paying even lower interest rates if your provider’s standard variable rate is lowered because of changes to the Bank of England’s base rate
• Lower early repayment charges compared to fixed-rate mortgage deals, which can help to keep charges to a minimum if you decide to pay more than your monthly repayments

Disadvantages of a discounted variable mortgage

Some possible disadvantages to a discounted variable rate mortgage include:

• Your mortgage provider’s standard variable rate could increase during the mortgage deal, which means that even though your mortgage rates will still be lower than the standard variable rate, they may go up – and can make it difficult to budget for payments if you don’t know how much they’re going to cost

It can be a good idea to speak to a mortgage advisor before taking out a discounted variable rate mortgage to discuss your options and make sure this is the right mortgage type for you.

Comparing discounted variable rate mortgages

Comparing discounted variable rate mortgage quotes can help you find the best mortgage deal for you. By using MoneySuperMarket’s mortgage comparison tool, you can compare discounted variable rate mortgage deals with other mortgage types to get more of an idea of which mortgage deal is right for you. Select what type of mortgage you’re looking for from remortgage, house purchase, first-time buyer or buy-to-let, then compare mortgage quotes. You can also filter the results by mortgage type to just see discounted variable mortgage deals.

You’ll be able to compare discounted variable quotes by the duration of the deal, the initial monthly mortgage costs you’ll repay during the discounted period, and the maximum loan-to-value – Max LTV – the provider is willing to lend you, to see if you could borrow more if you needed to. Each quote will also show you an example of the standard variable rate you’d then be moved onto at the end of the deal, so if your payments are likely to increase dramatically, it’s a good idea to think about whether you’d need to switch to a new deal once you’re on the standard variable rate.

The mortgage quotes are there to help you get a better idea of whether or not a discounted variable rate mortgage would be right for your borrowing needs – but you’ll still need to get an agreement in principle, and then a firm mortgage offer if you qualify, to take out a discounted variable rate mortgage. An agreement in principle and official mortgage offer will also take into account your financial situation and credit history, which can affect the discounted mortgage terms you’re offered, and whether or not you’re offered a deal.