Discount rate mortgages

Friday, 07 April 2006 12:00

A discount rate mortgage is a home loan secured against a property where the cost of repayments is reduced for a fixed term.

Discounted mortgages are ideal for younger homeowners and first-time buyers, who can benefit from an early reduction in payments and are confident that when the period of the discount ends (typically two years) they will be able to afford the higher payments.

A discount-rate mortgage offers a discount on one of the lender's other rates - often their standard variable rate - which will typically change broadly in line with the current Bank of England base rate.

For example, if a lender's standard variable rate is six per cent, for the period of the discount borrowers may be able to benefit from a rate of four per cent (assuming a two per cent discount rate). If the standard variable rate falls by 0.25 per cent to 5.75 per cent, the discounted rate will also fall 0.25 per cent to 3.75 per cent.

At the end of the period of the discount, mortgage-holders revert to the higher interest rate. The cost of meeting theses higher rates should be carefully considered when applying for a discount-rate mortgage.

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