A discount mortgage is a home loan offered by mortgage lenders to borrowers. It is designed to reduce monthly mortgage repayments over a specified period. This usually takes place over the first two or three years of the loan period.
Such loans are advantageous to home buyers, as they provide greater certainty over how much the borrower is required to pay each month, at least for the first few years of ownership of that property.
All lenders have a standard variable rate, often abbreviated to SVR. A discount mortgage will have a rate set below this – sometimes some distance below it. The rate paid on the loan is determined according to the current SVR set by the lender. The loan itself will be set at a specific discount. For example, a lender might offer a discount mortgage at 2% off their standard variable rate. If their SVR is set at 4.99%, the loan would be set at 2.99%.
However, this type of mortgage does not have a fixed rate applied. The idea is that the interest calculated on the loan always relates to the SVR in force at the bank or building society at that moment in time. For instance, if the lender decides to increase their SVR to 5.5%, the discount loan would then be increased to 3.5%. This is still some way below the SVR as per our example, yet it represents an increase on the payments the borrower was previously paying. As such, it is wise to be aware of the pros and cons of selecting a discount mortgage to borrow the funds to buy a property.