Discounted Mortgages Explained
, by Matt Stevens
Mortgages are substantial long-term investments, and this makes getting yourself the best possible interest rate vital. A competitive interest rate can save you thousands in the long run, while being on your lender’s standard variable rate (SVR) can prove very costly.
The crux is that when your initial mortgage term ends, you’ll be placed onto your lender’s SVR unless you remortgage. One product that can temporarily reduce your expenses is a discounted mortgage, or a discount variable-rate mortgage. To give you all the details, we’ve put together this article which answers all the relevant questions.
What is a Discounted Mortgage?
In straightforward terms, a discount mortgage is a particular type of variable-rate mortgage. With this arrangement, the lender provides a discounted interest rate based on their SVR for a fixed period of time.
How Do Discounted Mortgages Work?
Discount rate mortgages work by tracking your lender’s SVR, but at a reduced rate. Let’s say for instance that your lender’s SVR stands at 6%, and they extend a 2% discount to you. Consequently, the interest rate attached to your mortgage would be 4%.
However, it's important to note that SVRs are subject to change at the discretion of your lender. Additionally, each lender maintains their unique SVRs, leading to drastic variations. While one lender may offer a more sizable discount, their set rate could be considerably higher than another's.
How Long Do Discounted Mortgages Last?
Much like the SVRs themselves, the duration of a discounted variable-rate mortgage varies among lenders, being determined by the prevailing offers from your mortgage provider. Although, generally, discount rate mortgages last between 2-5 years.
You should also bear in mind that the specifics of your offer will be based on your personal situation and financial circumstances.
What Happens When Your Discounted Period Ends?
As with any mortgage deal, when this discounted term ends, you’ll be moved onto your lender’s SVR. If you don’t secure a new discounted variable-rate deal at this point, or instead switch to a lower fixed-rate deal, then you’ll end up losing out financially.
Pros of a Discounted Mortgage
Lower Interest Rate: The main advantage of a discount mortgage is that your mortgage interest rate will be considerably lower than your lender’s SVR throughout the course of the arrangement.
Leverage BoE Base Rate Changes: As with tracker mortgages, a discounted mortgage allows your lender's interest rate to adjust according to fluctuations in the Bank of England (BoE) base rate. This feature provides an opportunity for even more savings, especially when the base rate is low.
Cons of a Discounted Mortgage
Interest Rate Uncertainty: If your lender decides to change their SVR, then your interest rate will increase. Unfixed mortgages introduce an element of uncertainty to your interest rate, making it harder to manage your budget effectively.
Discounted Mortgage Collar: Some discounted mortgages may include a 'collar,' preventing your discounted interest rate from dropping below a specific percentage. This limitation places a cap on the extent of your benefit from SVR reductions.
Extra Charges: Discounted rate mortgages often come with early repayment charges (ERC) if you attempt to repay the mortgage early or switch to a new deal. This becomes a significant factor if rising interest rates go beyond your comfort zone.
What is the Difference Between a Discounted and a Tracker Mortgage?
As mentioned earlier, discounted rate mortgages share similarities with tracker rate mortgages, both potentially influenced by the BoE base rate. However, while a tracker mortgage guarantees alignment with the base rate, a discount mortgage is ultimately linked to your lender's SVR.
Though a discounted rate may sometimes be significantly lower than a tracker rate, resulting in an attractively affordable mortgage, it comes with a trade-off. That is, predicting future mortgage repayments is more challenging with a discounted mortgage compared to the more predictable nature of a tracker rate deal.
Choosing between the two options depends on your comfort with uncertainty regarding interest rates, and whether you are willing to trade predictability for potential savings offered by a discounted variable-rate mortgage.
How Can I Get a Discounted Mortgage?
Usually, less discounted mortgages appear on the market, relative to fixed-rate products. And so, it will be harder for you to find a suitable deal on your own.
For this reason, we highly recommend that you speak to an expert mortgage broker who can assess your case before laying out and comparing all the options available to you, ensuring you get the best discounted variable-rate mortgage for your situation.
We at The Mortgage Genie have a wealth of experience in helping people to make considerable savings by getting them a discounted mortgage. If the information here applies to you, then feel free to get in touch with our team of mortgage brokers by calling 0191589890 today. And why not see how much you could borrow up to right now by using our mortgage calculator?
