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For most people, getting a mortgage is one of the most important financial decisions in their lives. When you start to look for the best mortgage, you will see hundreds of mortgage products with different names and associated mortgage deals and interest rates. As a borrower, it is important that you understand the different types of mortgages so you can choose the mortgage that is best suited for you. In this suite of mortgage guides, we look at the different type of mortgages available in the market.
Previously we discussed standard variable rate mortgages, in this mortgage guide, we will focus on variable discount rate mortgages.
A discount rate mortgage is a 'type of mortgage' that is based on variable interest rates.
With discount mortgages, mortgage lenders offer a discount on the Standard Variable Rate (SVR) for a certain period, for say two to three years. As a borrower you should review the SVRs charged by different lenders and not simply base your decision on the discount. One bank may provide a discount of 2% on an SVR of 5%, and another bank may offer a discount of 1.25% on an SVR of 4%. After discount, you will pay an interest of 4% to the first bank, and 3.5% to the second bank. So even though the first bank is providing a higher discount, you will get a better deal with the second bank.
Example: Furness Building Society is offering a discount rate mortgage of 1.50% - SVR minus 4.04% for 2 years. So, for the first 2 years, there's a 4.04% discount on the actual SVR of 5.54%, resulting in an interest rate of 1.50% for the first two years. After two years, you will have to pay an SVR of 5.54% on the loan for the remaining term. There's an early repayment charge of 3% for the first 2 years (or the discount period).
Next: Tracker Mortgages