Updated: 15/09/2024
Easily understand a Discounted Variable Rate Mortgage, which is offered as a product that will set the Interest Rate you pay to the lender at an amount below their actual Standard Variable Rate for a period decided by them and agreed upon by you.
It is a type of variable-rate mortgage in which the lender provides a discount on its usual variable rate for a defined length of time, often a few years. If you do not refinance into a better deal before the end of this time, you will begin paying the more expensive Standard Variable Rate.
Added to this, your interest rate will not be fixed and will increase or decrease in relation to changes to the lender’s Standard Variable Rate.
So how does a Discounted Variable Rate Mortgage Work?
A Discounted Variable Rate Mortgage is similar to a Tracker Mortgage, the difference being that instead of tracking an external Base Interest Rate, it tracks the Standard Variable Rate at a discounted rate.
So, to explain; let us say that your lender has a Standard Variable Rate of four percent and your Discounted Rate is one percent, four minus one leaves you with an interest rate to pay of three percent. Should your lender decide to increase their Standard Variable Rate to say, five percent, your interest rate will be five minus one (Discounted) leaving four percent to pay.
Please note though, that your lender is free to change their Standard Variable Rate whenever they desire to do so, making future budgeting harder to calculate.
Discount Mortgage vs Tracker Mortgage
As discussed previously, a Discounted Variable Rate Mortgage works very much like a Tracker Mortgage, although the Tracker Mortgage will more commonly track the Bank of England Base Interest Rate, although it will be slightly above – This generally means that they offer among the lowest Interest Rates available.
The Discounted Variable Rate Mortgage though will track the lender’s Standard Variable Rate. In effect meaning that although they are cheaper than Standard Variable Rate Mortgages, there is a great risk that they will change and are quite unpredictable.
Are there any advantages of taking out a Discounted Variable Rate Mortgage?
There could be quite a few potential advantages to a Discounted Variable Rate Mortgage. For one, you will certainly pay a lower interest rate than your lender’s Standard Variable Rate for the period of your loan deal.
It is also quite possible you could pay an even lower interest rate if your lender reacts to any changes in the Bank of England Base Interest Rate. This could mean they lower their Standard Variable Rate. (It should be noted though, that Base Interest Rate has been at historically low levels for many years now, although it has started to rise).
The discount received is genuine in that the interest that will be saved would not be added to the loan.
Another advantage of taking out a Discounted Variable Rate Mortgage is you could have lower early repayment charges compared to a Fixed-Rate Mortgage, thereby giving some assistance with paying less in fees should you decide to overpay your mortgage loan each month in order to become mortgage free.
The arrangement fee is generally lower than a Tracker Mortgage.
Are There Any Disadvantages of a Discounted Variable Rate Mortgage?
It should be said that the main disadvantage of a Discounted Variable Rate Mortgage is that your monthly payments are not really fixed. For instance, even a slight rise in the Base Interest Rate such as 0.5 percent may add quite a lot more to your outgoing monthly payment. Obviously, if you can budget and take such increases into account it may not be a concern to you.
That said, it can be difficult to constantly budget for increases as you do not know when they will arrive and how frequently they may occur.
What Can I Do If My Discount Mortgage Repayments become Unaffordable?
Should this occur, there are options available to you. One is you could apply to re-mortgage and try to move onto a different deal that more suits the budget, although be aware you may have to pay an early repayment charge, so it is best to find out what that could be before agreeing to move over.
Also, try discussing your issue with the lender of your loan, there may be a solution or at least one that can help in the short term.
If it means switching to an interest-only deal or even taking a break from your repayments, think it through and calculate any extra costs first!
Easily Understand a Discounted Variable Rate Mortgage
We hope to have covered all the aspects of a Discounted Variable Rate Mortgage, and that you have managed to glean all the information you needed to move forward. If you are contemplating other options, please take a look at How Do British Mortgages Work, which is full of useful information.
Updated 2024