A discount mortgage is a variable rate mortgage that offers a discount on the lender’s standard variable rate (SVR) for a period of time. Once the fixed deal period ends, a borrower will be moved onto the lender’s SVR unless they remortgage to a new deal. This type of mortgage can be attractive when interest rates are low, as it means a lower initial monthly repayment.
However, it is important to note that the discounted rate only applies for a certain period and that if interest rates go up, the monthly payments will be more expensive. In addition, many discount mortgage deals will come with an early repayment charge (ERC) that a borrower must pay when they either switch or remortgage the mortgage.
One point – Which typically represents 1% of the mortgage amount – reduces the lender’s SVR by 0.25%. As mortgage rates can move daily, the exact reduction in the SVR will vary. For this reason, mortgage rates fluctuate and shopping around to find the best deal is important.
Most lenders will offer a discount for two, three or five years. However, some lifetime discounted mortgages will last the whole term of the loan, though these tend to have a smaller discount applied to the lender’s SVR.
Can My Mortgage Rate Change During the Fixed Deal Period?
A discount mortgage is based on the lender’s SVR, which is not tied to the Bank of England base rate. This means that if the Bank of England base rate goes up or down, your interest rates and, therefore, your mortgage payment will change too.
However, if the Bank of England base rate stays the same, then your lender’s SVR will stay the same, and you won’t see any changes to your mortgage payments.
The good news is that most lenders will have a cap in their terms and conditions on how low they can take their SVR. This can give you some peace of mind that if the lender’s SVR does fall, your interest rate won’t drop to an unaffordable level.
While a discounted mortgage is a good idea when SVRs are low, it’s important to remember that once the discount period expires, your mortgage will be switched onto the lender’s full SVR unless you switch or remortgage to another mortgage deal.
Many borrowers will remortgage before their discount period ends to benefit from a lower rate.
However, you should remember that most discount mortgages come with an early repayment charge and that you will need to factor this into your finances when deciding whether to switch or not.
For more information on the types of mortgages available, speak with a Citizens loan officer. We can help you compare the various options and determine which one is right for your situation.
Contact us today for a free consultation. We can help you navigate the complex world of mortgages and find the best financing for your unique needs.
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