Discount Rate Mortgages

Discount rate mortgages can seem like an attractive proposition when you are searching around for the best mortgage deal. The interest rate on repayment may be particularly competitive at the moment, since often the lenders' standard variable rates (SVR) reflect the Bank of England base rates and the discount rate mortgages will be a few percentage points below the SVR. The discount rate mortgages will offer a discounted SVR for a fixed period of time, typically two or five years but possibly longer than this, after which time you would revert to paying back the interest at the lender's standard rate.

One of the reasons why people prefer discount rate mortgages is that they can save money each month on the SVR, meaning that funds are freed up for other purchases and financial commitments. Discount rate mortgages are not the best choice for people who like to have complete financial stability, because the SVR is likely to change to reflect current market conditions and the discounted rate is obviously linked to this. If you do not like the idea of not knowing exactly how much is going to leave your bank account each month, discount rate mortgages may not be the best option for you and you should look into fixed-rate deals. However, if you are happy to take on that element of risk, you may find that discount rate mortgages offer you a more favourable rate of interest than steadier deals for at least the duration of your discount period.

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Discount Rate Mortgages Explained

• Each lender has a standard variable rate of interest, and this is effectively their default interest rate that mortgage deals will revert to after the introductory period.  Discount rate mortgages are offered by lenders' to attract new business, where the lender gives a discount on their standard variable rate (usually working out to several percentage points below the SVR) for an agreed period of time.
• There is an element of risk introduced to discount rate mortgages in that standard variable rates can change at any time.  They typically reflect the Bank of England base rate, but do not need to, and indeed several national lenders chose not to pass on the recent base rate decreases to their customers in the form of a lower SVR.  The SVR is unlikely to be the best deal on the market, because this rate of interest is only available to existing customers the lenders do not need to make it attractive to new potential borrowers.
• It is becoming far more commonplace to switch between mortgage deals at the end of the initial term (move before that, and you can incur financial penalties for moving).  Many people shop around when the initial terms of their discount rate mortgages end, to check whether a better deal is available.