Why do Investors discount mortgages when they purchase them?
To understand why investors discount mortgages when buying them, it is better to begin this article with an explanation of what is the discounts mortgages is all about. Discounted mortgages are a type of variable rate mortgage. That “discount” is offer because the interest rate is set at certain “discount” below the lender’s standard variable rate (SVR) for a certain period of time. The discount can be for an introductory term of two or three or five years, or it could even be for the entire term of the mortgage (discount for life).
For example, if the lender has an SVR of 5% and the discount is 1%, the rate the borrower will pay is 4%. If raising the SVR to 6%, and the discount rate will also rise – in this case, to 5%. These deals usually last between two and five years. When its discount mortgage deal comes to an end, the investor typically transfer borrower automatically onto its SVR.
Also, with a discount mortgage, it means the borrower is offered a percentage off of the investors’ standard variable rate (SVR). This takes the form of a reduction in the normal variable interest rate by say, 1.5% for a year or two. One of the main reasons investors offered discount mortgage is because it allows investors to dictate the actual pay rate after the discount is applied.
Another reason investor’s offer discount mortgage is that when the lender or Bank of England increases their base rate, the borrower mortgage payment will also increase. However, in some circumstances investors do not always pass on the full amount of a Bank of England base rate reduction.
Furthermore, Investors benefit from discount mortgage by receiving cash upfront as an option of waiting for money in the form of interest payments over time, which enhances the investor’s liquidity situation.
Again, as an investor. If I sell my note with discounts mortgage, a buyer with large discounts below the lender SVR may be in vulnerable position when the discount mortgage deal come to an end. The buyer will face large and sudden rate hikes when they’re transferred to their lender’s SVR.
Finally, another reason investors discount mortgages after purchasing them is because as the lender, the investor is free to raise its SVR at any time. Also, if the bank base rates are rise, the discount rate will also increase. An increase in interest rates certainly will increase the buyer mortgage payments, which will be a good investment for the investor.
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