Discount Mortgages

The advantages and disadvantages of discount mortgages . . .

A Discount Mortgage offers you an interest rate set at an amount (discounted) below the lender's standard variable rate. Normal terms are between one and five years.

Plus Points: Opportunity to pay less than the standard rates while payments fall with interest rates.

Points to Watch: The longer the period of discount the smaller the discount. These mortgages sometimes have early cancellation penalties.

There are 2 standard repayment methods for Discount Mortgages :

Repayment or Interest Only

Repayment

Your monthly instalments will contain two elements, one to repay interest and the other to repay some of the capital borrowed. The lender may require you to take out life insurance to cover the repayment of any mortgage outstanding.

Plus Points: This is the simplest form of repayment and reduces the amount owed to the lender with each instalment payment.

Points to Watch: Usually mortgages are taken for a period of 25 years (although you can choose a shorter period). This means that each time you move homes and re-mortgage you will be extending the period to repay the mortgage.

Interest Only

This means that your monthly instalments will cover only the interest you owe on the loan. Normally you will need to make arrangements to repay the capital from your other resources or set up a savings plan to cover the repayment in the future.

Plus Points: Keeps your instalments low and gives you the flexibility to invest in a range of savings plans, some of which can have tax advantages (e.g. Individual Savings Accounts (ISAs) or Pensions).

Points to Watch: As no repayment of capital is included in the monthly instalments you will need to make provision for this. There is no guarantee that your investment or savings plan will cover the mortgage repayment when it becomes due. You will need to monitor this carefully and increase your savings early if required.

Standard investment or savings plans are offered as options to repay the capital on an Interest Only Mortgages: