Discount rate mortgage

Discount rate mortgages are a loan that is secured against a property where the cost of repayments is reduced for a fixed term.

Discount rate mortgages are ideal for younger homeowners and first-time buyers, who can benefit from an early reduction in payments and are confident that when the period of the discount ends, they will be able to afford the higher payments.

A discount rate mortgage offers a discount on one of the lender's other rates - often a standard variable rate, which will typically change in line with the current Bank of England base rate.

For example, if a lender's standard variable rate is six per cent, for the period of the discount, borrowers may be able to benefit from a rate of four per cent (assuming a two per cent discount rate). If the standard variable rate falls by 0.25 per cent to 5.75 per cent, the discounted rate will also fall 0.25 per cent to 3.75 per cent.

At the end of the period of the discount, the mortgage will revert to the higher interest rate, the variable. The cost of meeting theses higher rates should be carefully considered when applying for a discount-rate mortgage.

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