Discount mortgages
What is a discount mortgage:
Discount mortgages are similar to Tracker mortgages in that they indirectly follow the Bank of Englands base rate.
As you may have guessed, the operative word here is indirectly! By strict definition the discount mortgage rate tracks the lenders Standard Variable Rate less the ‘discount’ percentage.
the Pitfalls of Discount mortgages:
Unfortunately discount mortgages have pitfalls, these pitfalls are a result of the indirect relationship between the lenders SVR and the BoE rate. Whilst you may have a contractual agreement to receive lending at a specific rate below the SVR, there is little bar public pressure to make the lender keep their SVR in line with the BoE rate!
To clarify this a little further, imagine you take out a 1% discount mortgage with a lender, and their SVR is 5%, you will be paying 4%, thats nice and easy to understand. Now imagine the following month the BoE drops rates by 50 basis points (half a percent), but your lender only drops their SVR 20 basis points.
This can also be detrimental to with rate increases, for example they may exagerate BoE base rate increases (lender rasies their SVR 30 basis points for every 25 the BoE).
As a final not on this pitfall, as you may have guessed, these lenders are very fast at upwardly revising rates, not so quick at reducing them!
You may be scratching your head at this point thinking who would take such a product where your debts are decided by a bank! Our simple answer is, we don't know - just get a tracker if you want to follow the BoE base rate.
Imagine a casino where the house decided what, if at all to pay out to a winner on a game of chance!