Our Guide to a Discount Rate Mortgages

The Mortgage bank discount rate mortgages
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According to Ipsos Mori, at least 18% of homeowners are on their lender’s standard variable rate mortgage. The standard variable rate is a mortgage whose interest rate is set by their lender, has no special discount, no fixed term, and can be changed whenever the lender decides.

It is often the most expensive mortgage a lender has on offer.  

A discount rate mortgage took the standard variable rate and applied a discount to it. Throughout the discount deal, the interest rate is pegged a fixed level below the standard variable rate. For example, if the standard variable rate were 5%, a 2% discount mortgage would be charged interest of 3%.

Throughout the mortgage term, the interest rate tracks the standard variable rate.

So, if the standard variable rate were to increase to 7%, the interest rate would rise to 5%. If the standard rate falls, the discount rate also falls.

When you take out a mortgage, the interest rate on your loan is one of the most important factors to consider. It affects the size of your monthly payments and how much you pay back overall.

Read on for full details of discount rate mortgages and the pros and cons.

Discount Rate Mortgage: How Does It Work?

Discount rate mortgages use a repayment model; each month, part of your payment goes towards paying off the capital you borrowed, and part goes towards the interest on that capital. At the end of your mortgage term, you will have paid off the money you owe plus interest and own your home outright.

Lenders are allowed to change their standard variable rate of interest at any time. Because discount mortgages are based on a lender’s standard variable rate, the cost of monthly payments on a discount rate mortgage can fluctuate.  

It is important to consider whether you could cope with a rise in the cost of your mortgage payments before taking out a discount rate mortgage.

Of course, interest rates can go down as well as up, which means you could benefit from low-interest rates on a discount deal.

However, around one-quarter of discount rate mortgages on the market in the UK has a ‘collar’. This is the minimum interest rate which can be charged on the mortgage and prevents access to the lowest interest rates. Usually, the collar is set at the interest rate when the mortgage was taken out, meaning that payments can only ever increase or stay the same.

At the end of the discount period, the lender will automatically move you onto their standard variable rate mortgage.

Unless you decide to remortgage before this, your monthly payments will increase after the deal ends.

Discount Rate Mortgage: Who Is It For?

Because discount rate mortgages have a variable interest rate, they are best suited to people who can afford to be flexible with their budget and tolerate the risk of a rise in the cost of their monthly payments.

Any changes to your the lender’s standard variable rate will affect your monthly repayments. If you are on a tight budget, this could risk landing you in financial difficulty.

If you are serious about getting the best value for money, you should also be willing to remortgage at the end of the discount rate period, in order to avoid consistently higher payments in future on the lender’s standard variable rate mortgage.

Discount Rate Mortgage: How Much Does It Cost?

If interest rates are low, discount rate mortgages can prove much cheaper than many options on the market.

However, some deals come with a collar, or minimum interest rate, which can prevent you from accessing the lowest rates even at times when interest rates are low across the broader economy.

At the same time, most discount rate deals have no maximum interest rate, meaning that there is no limit to the increase you could see in the cost of your monthly payments if interest rates were to rise.

Discount Rate Mortgage: What Happens at the End of the Deal?

At the end of your mortgage deal, the lender will transfer your mortgage to their standard variable rate mortgage. When this happens, your monthly repayments will suddenly increase, because you are no longer being charged interest at the discounted rate.

If you wanted to find a better deal, you could choose to remortgage at this point.

Discount Rate Mortgage: Pros and Cons

ProsCons
When interest rates are low, discount rate mortgage can be very cheapIt can be hard to budget with variable mortgages, as payments may change from month to month
You’re guaranteed a better deal than the lenders standard variable rateThe low payments during the introductory deal could give you a false sense of what is affordable in the long term
Deals with a ‘Collar’ prevent you from getting the best value when interest rates fall

How Can The Mortgage Bank Help?

Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.

They have already helped thousands of people get the best remortgage deal even people that have been refused before, and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting The Mortgage Bank.
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