Discount mortgages are a type of mortgage product that have a variable interest rate which moves roughly in line with the lender's Standard Variable Rate (SVR).
The discounted interest rates attached to discount mortgages are genuine and will normally apply for a set period of between one to five years. The discounted interest rate is designed to attract new customers.
Once the discount period expires the interest rate will convert to the lender's SVR which can result in a sharp increase in the monthly mortgage payments due. This means that borrowers should take careful note of when the discount is due to expire and prepare to remortgage to a more suitable mortgage product if required.
Also, because the discounted interest rate is a variable rate, any change in the lender's SVR will affect the discount mortgage's interest rate and the amount of monthly repayments due.
The lender's SVR will normally reflect changes to the Bank of England Base Rate (BoEBR), although this is not a requirement. Therefore borrowers should also take note of any major changes in the base rate as it could affect their own mortgage payments.
Discount mortgages are popular with first-time-buyers who can not afford high mortgage repayments during the early years of homeownership. Borrowers of discount mortgages will experience a reduction in their monthly mortgage payments during the discounted period when compared to borrowers who do not have a discounted rate attached to their mortgage products.
Despite this advantage, there are several disadvantages to consider before applying for discount mortgages.
The most prominant disadvantage to consider is that discount mortgages often come with stringent terms and conditions including long tie-in periods and costly early repayments charges.
Therefore, if a borrower wishes to redeem their mortgage during the discount period, they may be forced to pay hefty penalties to the lender that may negate the effect of the discount received.
Borrowers should therefore look beyond the discounted interest rate when assessing whether to apply for such discount mortgages.
As with all non-standard mortgage products, professional advice should be taken from an independent mortgage broker before applying for a discount mortgage in order to receive impartial advice as to whether this type of mortgage product is suitable for your particular needs.