Discounted Variable Rates

A discounted variable rate mortgage is yet another type of mortgage you can consider when shopping for financing for your new home. This is a variable rate mortgage that is offered at a slight discount over the lender’s standard variable rate. The discount does not last forever, but is offered to new customers to hook them in to a particular mortgage product.

How These Offers Work

As the mortgage industry becomes more and more competitive, lenders are beginning to look for ways to get new customers. Because mortgages are long-term financial products, typically lasting for 20 or 30 years, they can afford to give new customers a break at the beginning of the mortgage term. Discounted variable rates are one way they do this.

These mortgages offer the borrower a discount on the standard variable rate, but the discount is only for a few years, usually from one to five years. After that time the mortgage automatically switches to the lender’s standard variable rate. Either way, the borrower pays changing interest rates, but with the discount the interest rate is lower, thus saving the borrower money.

Good Idea or Bad Idea?

Are discounted variable rate mortgages a good idea or a bad idea? There is no pat answer to this question. There are some situations where they are good ideas. If you are already considering a variable rate mortgage, you can benefit from the discount on discounted variable rates at the beginning.

If you decide to go this route, you will want to do some research on your chosen lender. You want to make sure that their standard variable rate, which you will someday be paying, is not higher than most lenders. This is one way you could be hurt by choosing discounted variable rates.

Discounted variable rates can be dangerous, however, because this mortgage offer often comes with some sort of penalty that ties in the borrower. If you change mortgage products before a certain number of years, you will pay for this choice. Often the penalty period is longer than the discount period, which is another way the lender can get its money back.

Working with the System

You can benefit form discounted variable rates if you know how to work the system. If you can get one of these mortgages, save some money for a few years, and then change to another offer, you can continue to save money. Of course, you will have to watch out for terms to make sure you will not be locked in to the mortgage for too long. Try to choose a mortgage that does not tie you down for much more than two years.