DISCOUNT MORTGAGES
This is a discount off the lender’s standard variable rate (SVR) and only applies for a certain length of time, typically two or three years.
But it pays to shop around. SVRs differ across lenders, so don’t assume that the bigger the discount, the lower the interest rate.
Example
Two banks have discount rates:
- Bank A has a 2% discount off a SVR of 6% (so you’ll pay 4%)
- Bank B has a 1.5% discount off a SVR of 5% (so you’ll pay 3.5%)
Though the discount is larger for Bank A, Bank B will be the cheaper option.
Advantages
- Cost – the rate starts off cheaper which will keep monthly repayments lower
- If the lender cuts its SVR, you’ll pay less each month
Disadvantages
- Budgeting – the lender is free to raise its SVR at any time
- If Bank of England base rates rise, you’ll probably see the discount rate increase too
Their interest rates are variable and offer a discount on the lender's SVR. This means they will be a set amount below the SVR and will go up and down whenever it changes (and will change by the same amount).
The discount is usually around one or two percent less than the lender's standard variable rate and will last for a set period of a year or more.
For example: You take out a mortgage with a 2% discount. The SVR is 5% at first, so you pay 3%. After a year, the lender raises its SVR to 6%, so your new interest rate is 4% and your monthly payments increase.
Watch out for:
- Charges if you want to leave before the end of the discount period
