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.
- 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.
- 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
- 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.