There are various mortgage types in the UK but choosing which is best for you is a very specific decision. Research is essential, which is why we are here to break down what’s available so that you can determine the best choice for your financial situation. This week, we shall continue with our series by explaining how a discount mortgage works and whether it is the best decision for you.
The loan you receive with a discount mortgage is set at an amount below the lender’s standard variable rate (SVR). This occurs over a set period of time (2 to 5 years) or for the entirety of your mortgage.
Just like a tracker mortgage, this is a type of variable-rate mortgage. This means that what you pay could be subject to change throughout each month. This is due to the SVR (an interest rate) set by your lender that can go up or down by any amount and at any time. It’s important to remember that mortgage discount deals tend to be available for only a limited amount of time (2 to 5 years), compared to other mortgage types. As well as this, the longer the discounted period, the smaller the discount is likely to be.
When your discounted period ends
At the end of this period, your lender will automatically move you onto its SVR. This means your monthly repayments will increase as you will be paying a higher rate of interest. It is often advised that you re-mortgage your home at this point, either with your current lender or a new provider.
Pros of discount mortgages
- The rate of your mortgage will stay below your lender’s SVR until the period comes to an end.
- If the SVR is low, the discount mortgage could have an extremely cheap rate of interest.
Cons of discount mortgages
- The lender may change their SVR at any time, increasing the cost of your repayments.
- A discount mortgage may have a collar, meaning the interest rate cannot fall below a certain percentage and you are limited to how much you may benefit from falls in the SVR.
- Borrowers with large discounts may find themselves vulnerable when their deal ends as the interest rate could surge upwards when moved onto the lenders SVR
Finding the perfect property with the perfect mortgage
While you are looking for your ideal mortgage, you will also be looking for the perfect home. If you are in search of a property in the Heaton’s but you don’t know where to begin your search, Joule’s Estate Agents can help. We can help you find the perfect home in the area, so get in touch to learn more.