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A discount mortgage is a house loan with an interest rate set at a certain percentage below the lender’s standard variable rate (SVR) for a specific length of time (e.g., two or five years) or for the whole loan term.
A discount mortgage is a house loan with an interest rate set at a certain percentage below the lender’s standard variable rate (SVR) for a specific length of time (e.g., two or five years) or for the whole loan term. The SVR is a variable interest rate set by your lender, which can change at any moment and by any amount. A discount mortgage is a variable-rate mortgage, which means the sum you pay each month may vary. Discount mortgages can be extremely affordable during periods of low-interest rates. They may, however, come with a ‘collar,’ which is a specific pace that they are not allowed to fall below. According to Moneyfacts, about a quarter of all discount mortgages had a collar in December 2018. Unfortunately, some collars are set at the rate you are paying when you take out the loan, so any reduction in your lender’s SVR will not help you.
If the lender’s SVR is 5% and provides a mortgage with a 3% reduction, your initial interest rate will be 2%. However, if there were a 2 percent collar, even if the SVR later fell to 3 percent, your rate would not fall below 2 percent. However, most discount deals have no upper limit, which means that if the SVR skyrockets, your payments may skyrocket as well.
A discount mortgage deals come with an interest rate that is a certain percentage lower than the lender’s typical variable rate (SVR). When the SVR moves, it travels up and down. A discount mortgage differs from other variable mortgages in that it follows a rate established by the lender, known as the SVR, rather than the Bank of England. This means that your bank can adjust the rate you pay whenever they want because they are not bound by the Bank of England’s interest rate hikes.
Discount mortgages might be for two, three, or five years or the entire loan length, usually 25 years. If you do not remortgage to a better offer before the end of the time, you will have to pay the higher SVR. A discount mortgage, like any other variable mortgage, has the potential to increase as well as decrease your monthly payments. For instance, a lender’s discount mortgage is 3%, and its SVR is 5%. This means that the discount mortgage is set at a rate two percentage points lower than the SVR. As a result, if the SVR increased to 6%, the discount mortgage rate would rise to 4%.
Because discount mortgages are less popular than fixed rates, many lenders refuse to offer them. However, on a price-comparison site, you may find out what discounted mortgages are available and choose which form of mortgage you want.
Another alternative is to speak with a mortgage broker not affiliated with a bank. They will be able to shop around for the greatest offer for you, whether it’s a discount, another variable rate mortgage, or a fixed rate. Your broker may also have access to lenders who do not offer mortgages directly to borrowers and will tell you which lenders are most inclined to accept your applications.
Also, keep in mind that a collar is included with some discount mortgages (about a fourth of these products). This fixed interest rate cannot be reduced, regardless of the lender’s SVR changes. This will influence the total price you pay.
The real benefit of a discount rate mortgage is that the interest rate is usually — but not always — lower than the fixed rates available. Borrowers pay a premium for the certainty of knowing exactly what their monthly payments will be with a fixed-rate mortgage. Rates have fallen due to more competition in the fixed-rate market, so do not assume a discount will always be cheaper.
If you can discover a discount mortgage with a lower rate than a fixed rate, you will save money right away. But on the other hand, a discount rate mortgage comes with significantly more unpredictability than other types of mortgages.
For example, your rate is tied to the Bank of England’s bank base rate with a tracker mortgage, so it only changes when the base rate does. With a discount rate, however, your rate can vary because lenders can change their SVRs at any time. It is not just the frequency of rate fluctuations that matters, but also their magnitude. For example, a lender’s SVR could be increased significantly, resulting in a larger increase in your monthly price.
In addition, discount rate mortgages frequently come with penalties for paying off the loan early. You must pay this fee if you want to pay off your mortgage early, including remortgaging to a new contract. ERCs are computed as a percentage of the returned amount and can amount to thousands of pounds. As a result, if you apply for a discounted rate mortgage and later discover that the interest rate has risen above a level you are comfortable with, switching to a different product will cost you more than you thought.