Discount mortgages offer a variable interest rate that is set below the lender’s standard variable rate (SVR) for an agreed period. The discount rate fluctuates with the SVR, providing lower initial payments. This can make them more affordable initially, but payments may increase if the SVR rises.
- A discount mortgage offers borrowers the following advantages:
Lower interest rate
A discount mortgage provides borrowers with a reduced interest rate for a specific period, typically between two to five years. This discounted rate is usually lower than the lender’s standard variable rate, allowing borrowers to save money on their monthly mortgage payments, for that period.
Percentage discount
The discount is typically set as a percentage below the lender’s standard variable rate, ranging from 1% to 5%. For example, if the standard variable rate is 4%, the discounted rate could be as low as 3%. Although the difference may seem small, it can accumulate over time, resulting in significant savings throughout the discount period.
Lower payments
By taking advantage of the lower interest rate, borrowers can reduce their monthly mortgage payments. This can provide financial relief to individuals facing financial challenges or enable them to allocate more funds to other areas of their lives.
- It's crucial to be aware of the risks associated with discount mortgages:
Reversion to standard variable rate
Once the discount period ends, the interest rate on the mortgage will typically revert to the lender’s standard variable rate, which can be higher than the discounted rate. As a result, borrowers may end up paying more interest over the long term compared to alternatives.
Early repayment charges
Some discount mortgages may impose charges if borrowers refinance or pay off their mortgage before the end of the discount period. It’s important to understand these potential costs before committing to a discount mortgage.