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Discount Rate Mortgages FAQ
What is a discount rate mortgage?
A discount rate mortgage, or a discount variable rate mortgage, is characterised by an interest rate that is set below the lender's typical standard variable rate, or SVR. As the SVR of the lender changes, the discount rate mortgage changes with it.
These loans track the rate set by the lender, rather than tracking the Bank of England base rate. This means that your bank can change the rate you are paying according to their conditions.
How do discount mortgages work?
Discount mortgages are a kind of variable rate mortgage. The variable rate means that your discount mortgage interest rate can become more or less expensive as time goes on. For instance, if a lender's discount mortgage is around 3%, and its SVR is 5%, the discount rate you will be given should remain at 2% under the standard variable rate. If the SVR rises by 2%, then your discount rate would also increase by 2%.
When do discount mortgage rates change?
Discounted mortgages aren't affected by the base rate for the Bank of England. Instead, they mirror the lender's SVR, which can change at their discretion. In the past, many lenders have increased their discount mortgage rates, even when the BoE base rate stays the same. The discount you are given comes with a cost; namely the lack of certainty regarding exactly what your monthly payments are going to be in the future.
What's the difference between discount and tracker mortgages?
The difference is in the fact that a tracker mortgage follows the Bank of England base rate, and a discount mortgage follows the SVR of your lender. When choosing between a discount and tracker mortgage, you'll need to determine whether you're prepared to risk your lender raising their interest rate in return for the savings you'll get with a discount mortgage.
How long will a discount mortgage last?
Most discount mortgages are available across different terms, usually between one and five years. As with fixed-rate and tracker mortgages, there's a risk that you will be charged a penalty from your provider if you ask to exit your mortgage deal early during your agreed term.
Should I get a discount mortgage?
You may want to consider a discount mortgage if you like the idea of a lower interest rate in comparison to your lender's SVR. In some economic circumstances, this can mean that your discount mortgage comes with a very low interest level. However, discount mortgages are not ideal for those who want to know exactly what they're going to pay each month. Think carefully about the extent to which you need predictability in your repayments.
What are the risks of discount mortgages?
Because a discount mortgage tracks the SVR of your lender, and you have no control over this rate, there won't be much stability in your mortgage. At the end of your deal, you may be shocked at how much you need to pay on your mortgage, as your rate will often revert to your lender's standard SVR.
Can I leave my discount mortgage if the rate increases?
If the interest rate for your discount mortgage increases, you may be able to manage a small rise in cost. Or if you can find a cheaper mortgage deal, you might consider leaving your current deal and switching mortgage providers. However, you should be aware that some lenders will require you to pay an early repayment charge for this. Always check to see whether the discount mortgage comes with any charges like this before signing up.
How can I protect myself at the end of a discount mortgage?
When your discount rate deal ends, you will be automatically transferred onto the lender's standard variable rate. For most people with discount mortgages, this means that your monthly repayments will suddenly increase. To reduce your chances of financial problems, it's a good idea to start shopping around for a new mortgage deal three to six months before the end of your current term. Consider whether you want a tracker, fixed, or discount mortgage, and remember to factor in any arrangement fees.
For most homeowners with at least 20% equity in their home by the close of their discount mortgage deal, it may be possible to access a cheaper offer than your current lender's SVR.