Discount Mortgages
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Every mortgage lender has a standard variable rate (SVR) - this is its very own interest rate which it sets itself. The SVR, which is sometimes known as a base mortgage rate, is usually higher than those offered via fixed-rate or tracker deals and it can change according to the Bank of England's base rate.
It is usually two or three per cent higher than the base rate too.
When a fixed rate deal or a tracker mortgage comes to an end the borrower will usually switch their repayments to the SVR.
A discount mortgage is a home loan where interest is paid at the SVR, but with a percentage knocked off for a set period of time. It's basically a money-off deal.
Although it runs for a set period, which can be from one year to up to five years, the rate is likely to fluctuate during that time because the SVR can charge in accordance with changes to the Bank of England's rate.
Discount deals work in the same way as other mortgages in that the amount you can borrow is dependent on your income and the amount of deposit you have. It can be set up as a repayment mortgage or an interest-only loan and there are usually extra fees to pay when setting it up.
Who are Discount Mortgages for?
Discount mortgages are usually among the cheapest and most competitive on the market and therefore present an attractive proposition for first-time buyers. They are also a popular with people who want to switch deals to a mortgage which offers better value.
However, mortgage advisers usually suggest people considering taking out a discount rate keep a very vigilant eye on their finances. This is because the rate can change at any time, and if interest rates are on an upward trend the deal could become far more expensive, landing you with higher repayments than you originally budgeted for.
Pitfalls of Discount Mortgages
As already mentioned, the potential for discounted rates to go up in line with any Bank of England base rate rise is just as likely as it is for rates to go down. In fact, changes to the SVR are at the lender's discretion, so if rates go down, they are under no obligation to lower their mortgage rate.
Watch out for early repayment charges or penalties for switching deals ahead of time. Check the terms and conditions very carefully before applying and make sure the discounted rate is worth the fines you might incur for trying to clear your debt more quickly.
Where to buy Discount mortgages
Discount mortgages are very easy to find as most high street banks and building societies provide some kind of deal on their variable rate. As this area of the market is so competitive it is advisable to do your homework and check out as many offers as possible. Price comparison websites should have a good range of deals on their database. However, for information on the discount rates across the whole market an independent mortgage broker should be your first stop.
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