Standard variable rate mortgages (SVRs)
After the discounted period, unless you switch onto another deal, your rate will revert to your lender's SVR. Borrowers are generally advised not to hang around on their lender's full SVR for too long, as it will normally be a couple of percentage points higher than the more competitive initial deal rates available and, as a result, could make the repayments a lot more expensive.
A mortgage lender can increase or decrease its SVR whenever it wants, so during the discounted period of a mortgage your payments are still liable to fluctuate. You should also bear in mind that if there is a cut in the Base Rate, some lenders may pass them onto the SVR, but it is by no means guaranteed.
So, while your payments may rise in line with the Base Rate, discount mortgages offer borrowers the possibility of benefiting from falling interest rates while also offering the certainty of a cheaper rate than your lender's SVR, for a set period of time.
The discount tracker mortgage
Discount tracker mortgages work in much the same way as discount SVR mortgages, the only difference being that the discount applies to the Bank Base Rate rather than the lender's own SVR. Lenders can offer a discount off their lifetime tracker mortgages for the first couple of years or more. For example, if the Base Rate was 5.25% and your mortgage was set to track it at -0.01% for two years, a change in the Base Rate to 5% would make the rate on your mortgage 4.99%. Alternatively, if the Base Rate rose from 5.25% to 5.5%, your rate would increase to 5.49%.
The stepped discount mortgage
This type of product works in a similar way to a discount mortgage (see above), except the percentage discount changes at several points during the deal period. For example, you could have a two-year mortgage product that carries a discount of 2% off the lenders' SVR in the first and 1% in the second year, before reverting to the lenders' SVR at the end of the deal period.
Who should take out a discount mortgage?
Discount mortgages are often popular with people looking to remortgage. People coming off an existing deal will have a bit more experience in the market, and are likely to be in search of a good short-term deal. first-time buyers are, generally speaking, more likely to go for a fixed rate mortgage, as this kind of deal allows you to fix your mortgage repayments at a set level for a certain period of time.
As the interest rate on a discount mortgage is liable to fluctuate, however, borrowers who are looking to stick to a set budget each month may not be entirely suited to this kind of mortgage.
Predicting what will happen to the Base Rate is far from easy - in fact, it's impossible. Cashing in on decreases in this rate, or your lender's SVR, is certainly something to consider, but remember that rates can go up as well as down.
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