What is a Discount Mortgage?
A discount mortgage or a discounted variable mortgage has an interest rate that is ‘discounted’ at a certain level below your mortgage lender’s standard variable rate (SVR), for a set period of time. As the SVR goes up and down, then your discount mortgage rate will mirror the fluctuations and also move up and down. It works in a similar way to a tracker mortgage, except it tracks a lender’s SVR rather than the Bank of England’s base rate.
How long can you have a Discount Mortgage for?
Discount mortgages are usually offered for a set period of time, after which your lender will typically transfer you to its SVR. The set period is usually about 2 years although it can be offered for 3 to 5 years.
Advantages of a Discount Mortgage
- You will have a lower interest rate than those on the standard variable rate mortgage for the discounted period.
- If your lender’s SVR rate falls further, you could save money each month.
Disadvantages of a Discount Mortgage
- When your discounted period comes to an end, your interest rate will increase to the lenders SVR and your monthly payments will go up.
- Monthly payments will fluctuate, making it hard to budget. If you have a tight budget then a fixed rate mortgage might suit you better.
- Your rate will follow the lender’s standard variable rate. The standard variable rate can be changed at anytime for any reasons by the lender which makes a discounted rate one of the most volatile options.
Discount mortgages can offer some of the lowest rates on the market for the initial payment period, so can be an attractive option. However, you should bear in mind that your rate can go up and down so you need to be sure that you will be able to afford your monthly repayments should your rate increase at any time.