Cheap rates come with a sting in the tail Lenders are increasingly offering cheap, so-called "discounted" mortgages to attract more borrowers, but experts warn that these rates could rise at any time, leaving mortgage customers worse off. Discounted variable rate mortgages differ from standard tracker deals as they are linked to a lender's own standard variable interest rate (SVR), rather than the Bank of England base rate. As each lender sets its own SVR, there is a greater risk that borrowers on these deals could see their payments increase, even when the official bank rate remains unchanged. Adrian Anderson of broker Anderson Harris added: "While borrowers know where they stand with the base rate, with a discounted rate there is always the danger of a nasty surprise." Discounted variable rate deals are largely offered by building societies, though a number of banks have launched deals recently, including HSBC, Clydesdale and Yorkshire Bank. According to Nigel Bedford of Largemortgageloans. com, 27 lenders offer discounted rates for two, three and four-year mortgage terms. All but four of these are building societies. Funding for Lending boost The launch of the Funding for Lending scheme is expected to boost lending to households, with one lender already cutting rates for first-time buyers. Details of the £80bn joint Bank of England and Treasury scheme, which aims to make more cash available for loans to small businesses and households, were revealed last week. It will offer incentives to banks of even cheaper funding if they issue more loans, while those that do not use the funding to expand their lending will have to pay more. The scheme starts next month, but this week Royal Bank of Scotland said it would be launching cheaper rates for first-time buyers as a result of the new scheme. It has launched a five-year fix at 4.79 per cent, with no fee, for borrowers with deposits of 10 per cent or more. Mortgage brokers say the scheme should be used to help ease lending for certain segments of borrowers, such as those with smaller deposits. However, many believe lenders will instead use it to lend to low-risk borrowers with larger deposits. "The Funding for Lending scheme is probably the most interesting step taken by the government since 2007 to generate the right conditions for lenders to do what they traditionally do best, i.e lend," said Ben Thompson of Legal & General Mortgage Club. According to the minutes of July's Monetary Policy Committee meeting, published this week, an initial analysis by BoE staff of the scheme suggested it will more than offset the tightening in credit conditions that has occurred since May. "Linking lending to SVRs gives building societies more control over the cost of borrowing," explained Bedford. If a lender needs to improve their margins, they can do so by increasing their SVR, making them more attractive to lenders. Of the top ten variable rate deals available to borrowers with deposits - or equity - of 40 per cent or more, six are discounted variable rates and just four are standard tracker deals. Discounted variable rates are currently the best buy two-year variable rates for borrowers buying a £500,000 home with deposits of either 25 per cent or 40 per cent. This includes a rate of 2.85 per cent from Leeds Building Society, priced at 2.84 percentage points below its SVR of 5.96 per cent, and 2.49 per cent from HSBC, priced at 1.45 percentage points below its SVR of 3.94 per cent, respectively. "Discounted variable rates tend to be cheaper than fixes or trackers, but there is clearly a greater element of risk when you take one on," said Mark Harris of SPF Private Clients, the mortgage broker. Several lenders have already raised their SVR over the past year, including Halifax, the Co-operative Bank, Bank of Ireland, Yorkshire and Clydesdale Banks. This month, ING Direct became the latest lender to announce plans to raise its SVR by 0.49 percentage points to 3.99 per cent from next month. Bedford said many of his clients tend to prefer tracker mortgages as they provide more transparency and certainty. Mortgage brokers say most homeowners are opting for lifetime trackers or five-year fixed-rate deals. The cost of fixing a mortgage for five years has fallen recently, with Santander the latest lender to launch a five-year fix at 2.99 per cent, following the launch of HSBC's same- priced deal last week. Both offers are available for borrowers with deposits - or equity - of 40 per cent or more, and carry fees of £1,495 and £1,499, respectively. However, Santander's deal is only for existing current account and mortgage customers. "With interest rates not expected to rise for the next couple of years at least, a five-year fix gives security over a longer period of time and thereare some extremely cheap rates available," said Anderson. However, if the Bank of England base rate does not rise over the next five years, opting for a lifetime tracker could be cheaper. A homeowner with a £200,000 loan, opting for HSBC's five-year fix at 2.99 per cent, would pay £947 a month on a repayment basis, compared to £911 a month on HSBC's lifetime tracker of 2.64 per cent. "If interest rates do not rise over the five-year term, they would save around £2,160 on the tracker," said Harris. Base rate would need to rise by two quarter-points at least for the borrower's monthly payment to exceed what it would be on the fixed rate.