These mortgages give you a discount on the lender’s standard variable rate for a fixed period. The lender can adjust its rates at any time, meaning your monthly repayments can rise or fall with discounted mortgages.
A discount mortgage is a home loan where the interest rate is pegged at a set amount below the lender’s standard variable rate (SVR).
That means the interest you pay on your mortgage each month will rise and fall with the SVR. However, it will always remain a set amount cheaper for the term of the deal.
The discount can either be in place for a fixed period, for instance, three or five years or for the lifetime of the mortgage.
Discount variable-rate mortgages work in the same way as a fixed- or variable-rate mortgage: you make monthly repayments to pay off the capital (the amount you borrowed to buy your property) and the interest you owe. The payments are calculated to ensure you pay off everything by the end of the term, at which point you own the property outright.
However, with a discount variable-rate mortgage the interest is calculated differently. Usually, the rate is set at one or two percentage points below the lender's standard variable rate – this difference is the discount. If your mortgage lender decides to change their SVR, your discount variable-rate mortgage interest will change too. This means that your monthly repayments can go up or down.
For example, if your mortgage offers a 1.5 percentage point discount and the SVR is currently 5%, your interest rate will be 3.5%.
If your lender’s SVR goes up to 6%, your new interest rate will be 4.5%, and your repayments will increase.
If your lender’s SVR goes down to 4%, your new interest rate will be 2.5%, and your repayments will reduce.
The bank or building society decides how and when to adjust its SVR based on several factors. It is not explicitly linked to the Bank of England’s base rate, although the SVR might be influenced by it. Other factors that might contribute include the lender’s cost of borrowing, regulation and internal targets.
Often, lenders will have something called a “floor”, which says that your interest rate cannot fall below a certain level. This means that there will be an absolute minimum you have to pay.
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That depends. A discount mortgage by its nature is a couple of percentage points lower than the lender’s SVR, which means that most of the time you’ll save money compared to if you were languishing on a variable-rate mortgage.
However, it might still turn out to be more expensive than fixed-rate or other tracker-style mortgages. This depends on what happens with interest rates and the other factors that determine the SVR.
When interest rates are low, discount mortgages tend to be very good value. However, when interest rates rise, your monthly payments could become expensive.*
Most discounted mortgage rates only last for a set period – usually two, three or five years. But some last longer, and a few lifetime discounts are guaranteed for the whole term of the mortgage – usually 25 years. You will usually find that longer deals have smaller discounts.
If you want to switch mortgage deals before the discounted term ends, you will usually be charged an early repayment fee for doing so. Once the term ends, you are generally put on the lender’s SVR, or you can switch and move to a new mortgage deal.
Your rate will remain below your lender’s SVR during the term of the deal
When rates fall, you will benefit from lower repayments
These can be cheaper than other variable rates, and will usually start off less expensive than fixed rates
Your rate follows your lender’s SVR, which can change at any time and by any amount. If the SVR goes up, so will your monthly repayments
Some discount mortgages have an interest rate floor, meaning your discounted rate cannot fall below a set amount
If you want to get out of your deal early, you may have to pay a hefty early-repayment penalty
You will automatically be moved to the lender’s standard variable rate, which is likely to be higher, meaning you will pay more each month. At this stage, you can remortgage either with the same lender or a different one. You can choose another discount, a tracker or a fixed rate.
Most discount mortgages give a minimum rate in their terms and conditions. Even if the SVR falls, your interest rate cannot go below this floor.
All credit applications appear in your credit file. If you’re rejected, this can negatively affect your score, and several rejections can damage your rating significantly. For this reason, it’s best to space out your credit applications by three to six months. Even a successful application might change your score – this could be an improvement as you’ve got a mortgage or a temporary drop as you have more debt.
Yes, some discount mortgages are available when you buy your first home.
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