What is a Discount Remortgage?

A Discount remortgage offers borrowers the opportunity to pay a discounted interest rate for a set period of time. With a discount mortgage you initially pay a rate of interest that is set at an amount below the lender's standard variable rate (SVR), for a specified period of time, after which you revert to the SVR. If the lender's SVR is 6% and the discount is 4%, for example, the interest rate you will pay is 2%. With most discounted remortgages, the lower rate applies for two to three years, although lengthier deals are available. Many lenders offer a 'stepped discount' where the discount decreases in two or three stages. Generally, the bigger the discount, the shorter the period for which it applies. There are different discount rate terms to suit your circumstances and once you reach the end of the period you revert to paying the standard variable rate.

Discounted rates are of course variable as they are linked to the SVR, which is in turn set by the base rate. This means should the base rate fall, the SVR mortgage will quickly follow suit, meaning a decrease in your monthly mortgage payments hurrah! Unfortunately, should they rise the opposite will occur, leaving you out of pocket. Lenders also tend to be pretty hot at implementing an SVR rise, but can let many months elapse before applying a cut, meaning that you won't benefit straight away.

Is a Discount Remortgage Right For Me?

If you are a first time buyer a discounted mortgage can provide much needed extra cash for other expenses incurred when you buy a home for the first time such as furniture, kitchen and bathroom essentials. Likewise, if you believe that interest rates will fall, the discounted mortgage makes continuing reductions to monthly repayments possible. Discount remortgages are not for those on a tight budget as your mortgage payments could potentially vary quite a lot. However, if you've a little more money to spare and rates are low, or predicted to go down, snapping up a good discount deal could save you some money. And if you avoid any extended tie-ins you can simply re-mortgage at the end of the mortgage deal. Moreover, if you are simply looking for a mortgage holiday where you enjoy a lower mortgage payment for a couple of years, a discount remortgage is the way to go.

Beware of Mortgage Redemption Penalties

Like fixed rate mortgages, discounted mortgages tend to have redemption penalties should you try and switch mortgages or pay it off within the discounted period, you'll be slapped with a hefty fee. Bear in mind that not all discounted mortgages have redemption fees and is a matter that is fully negotiable when getting your mortgage. Our advice, nail down the redemption fees and you will have the option to remortgage when rates dip.

Tracker Mortgage vs Discount Mortgage

A discount mortgage applies a percentage discount off the lender's variable rate. With a discount mortgage, your monthly payments move up and down in accordance with the lender’s normal rate but you’ll be paying at a reduced rate over the specified time period. Ideally, you’ll want to find a discount mortgage that offers a one or two percent discount without a lock-in period, so you can remortgage with another lender when the discount period comes to an end. With a tracker mortgage, the difference between the Bank of England base rate and your mortgage rate is fixed. For example, your mortgage might be set at 1% above the base rate, and as the base rate rises and falls, your mortgage will track along with it. Tracker mortgage rates usually apply for the entire duration of your mortgage, so in that respect they differ from fixed rate mortgages, discount mortgages, and any other special rate deals which tend to only apply for the first few years.