Discount Rate
A discounted rate is a type of variable interest rate – so your payments can go up and down. They work by offering a set discount on a lender’s Standard Variable Rate (SVR).
So, if the lender’s SVR is currently 5.00% and the discounted rate offers a 1.00% discount the you’ll initially pay 4.00%.
Then, if the SVR goes up to 6.00% at a later date, your discounted rate would go up to 5.00%. If the SVR goes down by 1.00%, your discounted rate would also go down by 1.00%.
When your introductory period comes to an end, you will most likely go onto your lender’s Standard Variable Rate.
Discounted rates tend to come with an Early Repayment Charge, if you pay off the mortgage early or remortgage to another lender during the introductory period. However, most will let you make overpayments – normally up to 10% of the outstanding balance per year.
If you have a lifetime discounted mortgage, the Early Repayment Charge will probably not apply for the full term of the mortgage, but only for an initial two to five-year period (depending on your lender).
Although discounted mortgages may sound like a good deal, they’re not necessarily the cheapest mortgage rates you can get – you may be able to find a cheaper tracker mortgage, for example. And remember, discounted mortgages have variable rates, which means you won’t get the same payment security as you do with a fixed rate.
Advantages and Disadvantages
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When interest rates are low, your payments will be lower |  |
If interest rates go up, so will your payments. |
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Discounted rates can have quite low mortgage arrangement fees in comparison to a fixed rate or tracker | |
Although they have the word “discount” in the title, discounted mortgages may not be the cheapest rates on offer |