The majority of first-time buyers choose a fixed-rate mortgage, lured by the promise of unchanging monthly payments. But in a market offering historically cheap deals, are there better alternatives available?
While fixed-term mortgages have largely cornered the first-time buyer market, new data shows discount mortgages may offer a better deal – but only in certain circumstances.
Here, we take a look at how discount mortgages work and investigate whether the numbers stack up against popular fixed-rate deals.
What is a discount mortgage?
While fixed-rate mortgages lock in your interest rate for a set number of years, rates on discount mortgages are variable from day one.
With this type of deal, your interest rate is based on a discount of your lender’s standard variable rate (SVR). Like fixed-rate offers, discount mortgages are usually offered for a set number of years, after which you’ll move to the SVR.
Let’s take a simple example. If your lender’s SVR is 5% and your deal offers a discount of 1%, you’ll pay 4% interest. This means payments can be volatile if rates change – if the lender’s SVR rises to 6%, you’ll pay 5% interest.
- Check out our full guide for more on how discount mortgages work, including how the Bank of England base rate affects what you’ll pay.