Variable & Discount Rate Mortgage Quotes
The Standard Variable Rate
The Standard Variable Rate (STV) works on the following premise: The mortgage lenders actually have to borrow the money they themselves lend to the buyer. The profit is accrued to them because the buyer is charged more interest than they are by their lenders. This amount is generally around 2%. It then follows that when the rate of interest paid by your lender, based on the Bank of England’s constantly adjusted base rate, is increased, that this increase is passed on to the borrower in order to maintain the margin of profit.
In a simple example: If the mortgage lender is initially charged at the rate of 4% interest on the money they initially borrowed, and then the base rate rises by 0.5%, this extra charge will immediately be passed on to the borrower, so that an original repayment of 6% will now automatically become 6.5%. This re-adjustment is usually made immediately. It also follows that if the interest rate falls, then the interest rate paid by the borrower also falls, though in truth, this adjustment is not always made quite so quickly.
Generally speaking the STV works well during periods of relative financial stability, but it can, and often is, subject to fluctuation, which may not always be to the advantage of the borrower. However, though the borrower may not initially choose this type of mortgage, it is likely that the lender will automatically switch to this scaling of payments once any fixed-term deal comes to an end.
Discounted Interest Rates
With the discounted interest rate mortgage, the mortgage lender simply offers to reduce the Standard Variable Rate (SVR) for a limited period of time, which can be for as much as five years, but is more likely to be two years. This means that the mortage lender may offer the borrower, for example, a 2% discount on the (SVR) for this limited period, thereby reducing the interest element to, for example, 5% on an (SVR) which was originally quoted at 7%. But because interest rates are always calculated to the (SVR), should there be a fall or rise in the base rate, then payments would continue to be variable.
Again this might be a suitable choice for first-time buyers or those on a limited budget, as obviously repayments would be lower during the lifetime of the discount period.
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