Discount mortgages provide interest rates at a fixed percentage below the standard variable rate. Although this type of mortgage seems like a great way to save money, it does come with some risks.
In this guide, we’ll discuss what a discount mortgage is, how they work and whether they are right for you.
Key Points:
- Discounted mortgages have interest rates set lower than the lenders standard interest rates
- Discounted mortgage deals can last for two, three or five years
- They are not affected by the Bank of England’s rate; instead, they always mirror the lenders standard interest rates
What is a discounted mortgage?
A discounted mortgage is a type of variable rate mortgage in which the lenders offer you a discount on the standard variable rate (SVR) for a fixed period of time.
Once you come to the end of that term, you then start paying a more expensive SVR, unless you can remortgage to a better deal.
What’s the difference between a tracker and a discounted mortgage?
Tracker mortgages and discounted mortgages are very similar. However, the main difference is that a discounted mortgage tracks your lender’s SVR, whereas a tracker mortgage tracks the Bank of England’s base rate.
When you’re deciding on which option you should choose, you will need to establish whether you’re prepared to face any possible unpredictable increases in interest rates.
If you choose a discounted mortgage, rates will go up and savings will be offered, whereas you may end up paying a bit more with a tracker mortgage. However, with this mortgage, you will find it easier to forecast if and when the Bank of England’s base rate changes.
How do discount rate mortgages work?
All lenders set their own SVR and it is the rate you move to at the end of any fixed-rate periods. A discount rate mortgage tracks the SVR, but at a discounted amount.
- For example, if the lender sets the SVR at 4%, and the discounted variable rate is at 1% below it, your interest rate would be 3%.
The SVR can alter though, meaning the amount of interest you pay on your mortgage repayments could change. However, the interest you always pay will always be charged at the fixed percentage below the SVR.
So, if the SRV changed to 5% and your agreed discount is 1%, you’d be charged interest at 4% on your mortgage repayments.
Since lenders set their own SVRs, they can vary significantly. Due to this, you should always shop around first to find the best deal for you, and definitely get the support of a mortgage broker.
How long can you get a discount mortgage for?
Discount mortgage deals usually last between two to five years. How long your deal lasts really depends on current deals that mortgage providers are offering, and it will also depend on your credit history and current financial situation.
Once the deal ends, you will be moved onto your lender’s SVR, which is likely to be higher. At this point, you can look to take out a new discounted mortgage deal or fix yourself with a different low-rate deal.
How much can you save with a discount mortgage?
How much you can save with a discounted mortgage really depends on the size of the mortgage you need, the discount you’re offered and how long it applies for.
When you’re comparing mortgage deals, you should look at both the discounted interest rates and the SVRs they’re linked to, since this is what you’ll pay if you don’t switch deals at the end of your offer period.
It’s also a good idea to compare them with fixed tracker rate deals with other lenders. You should also factor in other costs, such as mortgage arrangement fees.
What happens when the discounted period of a mortgage ends?
As we’ve mentioned, once your discounted mortgage term comes to an end, your interest rates will revert back to the lender’s SVR. It will be the rate you’re currently paying, but it won’t have the discount on it.
It’s a good idea to start comparing remortgage deals 2-3 months before the end of your discounted period so you can decide what type of mortgage product you want to move forward with.
Remortgaging enables you to switch to a new mortgage provider who could offer you a new introductory rate. This may be another discounted mortgage, a tracker mortgage or a fixed-rate mortgage instead.
Pros and cons of discount mortgages
As with any kind of mortgage product, there are pros and cons that you should be aware of before you jump straight in.
Pros of discount mortgages:
- Can be cheaper than other mortgages thanks to the discount
- Since it is a variable rate, your mortgage repayments could reduce further if the lender reduces the SVR
- There are lower early repayment charges compared to fixed-rate mortgage deals. This can help keep charges to a minimum if you decide to overpay monthly
Cons of discount mortgages:
- Your monthly repayments could rise without warning, meaning your outgoings could change monthly
- There may be a cap on how much your payments fall, even if the SVR falls. This means it could minimise the amount you save
How can you get a discounted rate mortgage?
To get a discounted rate mortgage, we always recommend shopping around and enlisting the help of an experienced mortgage advisor who can help you find the best rates based on your current circumstances.
At Barlow Irvin, we have years of experience helping people from all walks of life securing a mortgage, and discount mortgages are no exception. All you need to do is tell us about yourself so we can understand your mortgage needs and from here, we’ll find the best deal for you.
For more information about discounted rate mortgages, or to get started with your own discounted rate mortgage, get in touch with us today.