What are Discount rate mortgages?

What are discount mortgages?

Discount mortgages are a type of variable rate mortgage (Mortgages that can move up or down in interest rate, usually track the Bank of England base rate).

Discount mortgages work by being discounted to a certain margin below a lenders standard variable rate mortgage. E.g 1% below the lenders standard variable rate.

Advantages of discount rate mortgages

  • If interest rates fall and your mortgage lender decides to reduce its standard variable rate, the interest rate on your mortgage will fall as well.
  • Discount rate mortgages usually have lowmortgage arrangement fees
  • The interest in your mortgage will always be below the mortgage lenders standard variable rate till your discount mortgage term ceases.

Disadvantages of discount rate mortgages

  • If interest rates fall your rates might not even move as unlike tracker rates the standard variable rate of a lender moves only at the mortgage lenders discretion.
  • If your discount mortgage term is only an introductory offer which lasts between 1-5 years. Once your discount rate mortgage is over you will then move on to the lenders standard variable rate which is usually much more expensive.

This means your monthly mortgage payments will rise. You need to be comfortable that you will be able to cope with any potential rise in your monthly mortgage payments before choosing a discount rate mortgage.

  • Discount mortgages will usually have high early repayment charges which means you will not be able to remortgage without high costs.

If you manage to get a lifetime discount mortgage which means the discount will continue till the end of the mortgage term. In this case, the early repayment charge will be reduced after an initial term based on your mortgage lender.

Discount mortgages are not always the best deal. A suitable fixed mortgage might represent better value. You should consult the services of a suitable digital mortgage broker for mortgage advice.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.