Basically all a discount rate does is offer a discount
from the standard variable rate (SVR) for a given period
of time.
Some lenders offer a normal term based level discount
rate such as a two year discount of say 1%. That means
your rate will be 1% less than your lenders SVR for a
period of 2 years. If their SVR increases then your
mortgage will increase proportionately. See the diagram
below for an example.
Please note the graph below is not accurate and is for
illustrative purposes only.
Other lenders offer what is known as a stepped discount.
Which is a similar principle to that of a term based
discounted rate but instead of being level for the term
of the discount this rate will rise of a period of time.
An example of this type of product is a 3 year stepped
discount may operate on the basis of a 3% discount year
1, 2% discount year 2 and culminating and ending in a 1%
discount in year 3.
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