Discount mortgages are effectively variable-rate mortgages, but they have interest rates which are fixed at a level a set amount lower than the lender’s usual “standard variable rate”, or SVR.
If a mortgage has a one percent discount then borrowers will pay five percent interest while their lender’s SVR is six percent. If the SVR is lowered to five percent, then the holder of the discount mortgage pays four percent interest.
A discount mortgage lasts for anything from two to five years and, once it reaches its conclusion, borrowers are transferred automatically to their lender’s standard variable rate. Those who are considering taking out a discount mortgage might like to consult a qualified adviser who has taken a CeMAP course, in order to decide whether this kind of deal best suits their needs.
One advantage of a discount mortgage is that customers can rely on paying interest at rates which are lower than their lender’s SVR while the arrangement lasts. Should the Bank of England set a low base rate, resulting in a reduced SVR, someone with a discount mortgage could be fortunate enough to end up paying exceptionally low rates of interest.
A disadvantage associated with discount mortgages is that borrowers who are lucky enough to have big discounts could be more at risk than most when their deal ends. Having to cope with a sudden, large rise in interest rates could potentially cause financial difficulties. A decision to end a discount mortgage before the set period could also lead to borrowers being asked to pay charges.