“….3.99% fixed for two years and conditions apply….”. This is just one example of a mortgage on the market but there are hundreds if not thousand more such products available for would be house buyer. The conditions associated with this type of product are-
That the interest rate; the discounted interest rate, reverts back to standard variable at the end of the two year period. For example, if 3.99% represents a discount of 2% from the standard mortgage package then the variable interest rate will be 5.99%. The variable rate at the end of the two year period may well be 6.7% depending on the interest rates at the time or if there is a downward trend in the property market, your interest rate two years on may well be below 3.99% at the rate of say 3.2%. Since market conditions are very difficult to predict in advance you; as a customer, may well find yourself at a disadvantage. The variable rate being either higher or lower than the 3.99% discounted initial rate has implications for your cashflow as well as living standard. Higher rate than 3.99% may cause you financial hardship and conversely a rate lower than 3.99% will increase your disposable income and thereby improve your living standard.
There are usually penalty clauses for an early exit. 3.99% being the discounted rate for you, if a situation arises that you have been offered a better deal elsewhere. Your option to exit from your current agreement with your existing lender are limited. Your existing lender will levy a fee if you were to get out of the agreement. In very limited cases, the new lender may cover that cost as well as other legal costs but he will also tie you into a similar contract.
Is the discounted mortgage a win-win option for both lender and customer
The customer can-
Plan hisher finances knowing that a fixed amount of money is going towards housing costs every month.
The discounted interest rate may well provide a better comparison to the renting option.
Discounted rates help customers expedite their purchasing decisions. In essence, it is an incentive to buy ones home.
Compete for business by offering products and packages that are or appear to be more competitive than the competition.
Use discounted instruments to improve business during slow market conditions. A good example of slow market conditions would be post collapse of the housing boom of the late 80’s in the UK and elsewhere in Europe.
Finally, discounted mortgages are a good entry point for people with lower income levels even. I say this because buying a property is very risky anyway but lower rates reduce that risk somewhat even if it is for a short period of time. Reduced mortgage costs to the consumer provide a very good incentive and a boost to the housing market as well as increasing the demand for housing. Research findings for the period 1986 to 1988 show that demand for housing increased by 13% as a direct result of the discounted mortgage rates. In conclusion, discounted rates are therefore good for the consumer and good for the lenders.