A discount rate mortgage, which is a type of variable rate, offers a fixed reduction on the lenders Standard Variable Rate (SVR) for an agreed period of time.
Payments on the mortgage can rise and fall at any time in the set period if the lender’s SVR was to change. Essentially this means if the SVR was to increase, so would your payments, and if the SVR was to decrease, your payments would too. One thing that is guaranteed is that despite the interest changes, the amount you pay will always be reduced by the discount rate agreed.
It is important to note that lenders reserve the right to set their variable rate. They may change it to reflect and react to the general condition of the mortgage market, or for their own competitive reasons.
Once the agreed period of time has elapsed, the mortgage will return to the SVR of the lender, meaning your payments will increase.
The discount rate will be for a period of time (usually two to five years). During this period it is likely early repayment charges will apply. As a result, you will incur charges if you try to switch or settle your mortgage within the discount period.
When deciding to take a discount rate, consideration should be given to the affordability of the mortgage payments if the rate were suddenly to increase.
How does a discounted rate work?
If a lender has a Standard Variable Rate of 5.50% and you have a discount of 0.50%, the rate you will pay would be 5.00%. If the SVR fell to 4.50%, you would only have to pay the rate of 4.00%.
Advantages of a discount rate
- Lower payments in the early years to help with the cost of moving
- Your rate will remain below the lender’s SVR
Disadvantages of a discount rate
- If interest rates rise, your payments will increase
- You may face sudden rate increases when your discounted period finishes