Glossary: Discount rate mortgage
This is a mortgage where a discount is applied to the lender’s standard variable rate (SVR) for a set period; usually two years but also available for three and five years. As the lender’s SVR rate moves up or down in response to Bank of England base rate movements, the discounted rate moves by the same amount. At the end of the discount period, the rate reverts to the lender’s SVR – often an uncompetitive rate. If you decide to shop around for a better deal check you won’t be charged a redemption penalty should you seek to remortgage with another lender.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
If you want to escape from a special mortgage deal within a specified timeframe, which often extends beyond the deal ending, the lender will levy redemption penalties. The early redemption penalty might be several months’ interest or a percentage of your loan. Either way, it could cost you several thousand pounds and is the mortgage lender’s way of making you stay put after the initial low interest rate period has ended paying an above-average rate.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.