A discount mortgage has an interest rate where a
discount is applied to the lender's standard variable rate
for a set period, usually from six months to several years.
As the lender's standard variable rate moves up and down,
so the discounted rate moves up and down by the same
amount, with the differential between the two remaining
the same.
Pros
and cons of discount mortgages
Advantages You can benefit from a lower interest rate
in the first few years, freeing up money for furnishings,
carpets or whatever else you want. You can benefit from
a fall in the Bank of England's base rate when it results
in a subsequent fall in the lender's standard variable rate.
Disadvantages Early redemption penalties will almost certainly
apply, which may also extend beyond the end of the discounted
period. This means you will be unable to change your mortgage
during the 'early redemption penalty period' without paying
a fee, which may be up to the value of six months mortgage
repayments. So, you may be trapped in an uncompetitive rate
once the interest rate reverts to the lender's standard
variable rate. You will normally have to pay an application
fee when arranging your discount mortgage.
At the end of the discounted period your mortgage payments
will suddenly increase as the mortgage reverts to the lender's
standard variable rate.
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