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Discount Rate Mortgages

A discount mortgage has an interest rate where a discount is applied to the lender's standard variable rate for a set period, usually from six months to several years. As the lender's standard variable rate moves up and down, so the discounted rate moves up and down by the same amount, with the differential between the two remaining the same.

Advantages

  • You can benefit from a lower interest rate in the first few years, freeing up money for furnishings, carpets or whatever else you want.

  • You can benefit from a fall in the Bank of England's base rate when it results in a subsequent fall in the lender's standard variable rate.
Disadvantages

  • Early redemption penalties will almost certainly apply, which may also extend beyond the end of the discounted period. This means you will be unable to change your mortgage during the 'early redemption penalty period' without paying a fee, which may be up to the value of six months mortgage repayments. So, you may be trapped in an uncompetitive rate once the interest rate reverts to the lender's standard variable rate.

  • You will normally have to pay an application fee when arranging your discount mortgage.

  • At the end of the discounted period your mortgage payments will suddenly increase as the mortgage reverts to the lender's standard variable rate.


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