The discount rate, otherwise known as a discount variable rate or discounted rate, is a variation on the standard variable rate. This means monthly repayments vary in conjunction to the Bank of England’s base rate. As an incentive to attract new customers lenders offer a discount on their variable rate for a fixed period. As with other incentive interest rate deals it operates for just a small proportion of the full mortgage term. Usually the greater the discount the shorter the discounted period will be.
The lenders want to attract new customers but they don’t want to lose them so with a discount interest rate there is likely to be a overhanging redemption penalty for leaving the mortgage early, after enjoying the discount rate. After the discounted period ends the borrower will be switched to the lenders standard variable rate. This is why it is important to have an idea what the lender will likely charge as a standard variable rate.
Stepped discount rate mortgage
With a stepped discount rate the discount decreases every year. Here is an example:
2.75% Discount Year 1
1.75% Discount Year 2
1.00% Discount Year 3
0.50% Discount Years 4 and 5
Sometimes a stepped discount rate mortgage is referred to as a stepped base rate tracker. This means it is a
tracker mortgage with a discount that goes down every year.
