{"id":222549,"date":"2019-09-02T11:43:17","date_gmt":"2019-09-02T10:43:17","guid":{"rendered":"https:\/\/www.finder.com\/uk\/?p=222549"},"modified":"2024-07-12T07:11:58","modified_gmt":"2024-07-12T06:11:58","slug":"discount-mortgages","status":"publish","type":"post","link":"https:\/\/www.finder.com\/uk\/mortgages\/discount-mortgages","title":{"rendered":"What is a discount mortgage and is it right for you?"},"content":{"rendered":"
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.<\/div><\/article>

A discount mortgage is essentially a home loan where the interest rate is set at an amount below the lender\u2019s standard variable rate (SVR).<\/p>

This could be for either a set period (two or five years) or for the whole mortgage.<\/p>

The SVR is an interest rate set by your lender, which it can raise or lower by any amount, at any time.<\/p>

However, a discounted mortgage is a type of variable-rate mortgage, meaning the amount you pay could change from month to month.<\/p>

How do discount mortgages work?<\/h3>

When you repay your mortgage, part of the money goes towards the interest charged by your lender and the other part towards repaying the money you\u2019ve borrowed.<\/p>

The saving you make on a discount mortgage only applies to the interest that you pay.<\/p>

In this case, if a lender has an SVR of 5% and the discount is 1%, the interest rate you will pay is 4%.<\/p>

If your lender raised its SVR, let\u2019s say to 6%, your discounted interest rate would also rise, in this case to 5%.<\/p>

If your interest rate increased, your monthly mortgage payments would go up too but you would be paying more interest, rather than repaying more of the money you\u2019d borrowed.<\/p>

When does a discount rate change?<\/h3>

Discount mortgages are not affected by the Bank of England base rate. Instead, they always mirror the lender\u2019s SVR, which can go up or down at anytime.<\/p>

For instance, if several big lenders increase their SVR, their discount mortgages will also increase, even if the base rate hasn\u2019t moved for years.<\/p>

What\u2019s the difference between discount and tracker?<\/h3>

Trackers and discount mortgages are often classed as virtually the same thing, with discount mortgages being marginally cheaper.<\/p>

But the difference is that a discount mortgage tracks your lender\u2019s SVR, rather than the Bank of England base rate.<\/p>

To decide which of these options you should choose, you\u2019ll need to work out whether you\u2019re prepared to risk your lender putting up the rate in return for the savings offered with a discount mortgage or if you\u2019d rather pay marginally more in order for your interest rate to be pegged to the base rate with a tracker mortgage.<\/p>

You may prefer a tracker deal because it is possible to make an educated guess about when the Bank of England base rate is going to change, while it can be almost impossible to tell when a lender will change its SVR.<\/p>

What do I do when my discount mortgage ends?<\/h3>

Discount mortgage deals are usually offered for somewhere between two and five years.<\/p>

The longer the discounted period, the smaller the amount the discount tends to be.<\/p>

When this timeframe comes to an end, your lender will usually transfer you onto its SVR automatically.<\/p>

This means that your monthly repayments will increase, as you\u2019ll be paying a higher rate of interest.<\/p>

At this point, you should think about remortgaging to find a better new deal.<\/p>