Find out whether you could save money on your mortgage repayments with a discounted rate. See how a broker can help
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With mortgage rates currently at levels not seen in decades, it’s a stressful time to be buying a home or remortgaging. If you’re worried that you now can’t afford the mortgage you need, you might consider a discount mortgage.
This will ensure that you pay below the lender’s standard variable rate. However, there are other mortgage types available that could be better for you in the long term. We’ll provide more information to help you decide.
What is a discount mortgage and how does it work?
A discount mortgage is a type of variable-rate mortgage. You’ll sign up to the lender’s standard variable rate (SVR) but will be charged at a discount of a set percentage for an agreed period.
For example, if the lender’s SVR is 5% at the start of the mortgage, the discounted rate could be 3.5%. Variable rates can rise or fall, so if the lender’s SVR rises to 6%, your discounted rate could be 4.5%. If the SVR falls to 4.5%, your discounted rate could be 3%.
Each lender has their own SVR and they’re free to change it at any time – it doesn’t necessarily maintain a relationship to the Bank of England base rate. They can also decide how much of a discount to offer. So, two discount mortgages with different lenders could have completely different monthly repayment amounts.
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How long can you get a discount for?
In most cases, the lender will offer a discount on their SVR for two, three, or five years. Some will offer a discount for the full term of the mortgage (i.e. 25 years for a typical mortgage). This is called a lifetime discount mortgage.
Is a discounted mortgage a good idea right now?
A discounted mortgage might appeal at the moment as many lenders currently have an SVR of over 6%. Choosing a discount mortgage would give you a lower rate, at least for the first couple of years. But there are drawbacks. We’ll summarise both sides of the argument.
You’ll pay a lower rate than the lender’s SVR
You’ll likely start repaying at a lower rate than the lender’s fixed rate (though your rate could go down or up over time)
If your lender’s SVR goes down, your mortgage repayments could become cheaper (although many lenders will set a minimum rate in their terms and conditions)
As with any variable-rate mortgage, your repayments could increase at any time
Unlike tracker mortgages, your lender is free to increase their rate whenever they want, not just when the Bank of England base rate rises
If you don’t remortgage in time when your discounted rate ends (or you can’t find a suitable deal), you’ll revert to the lender’s SVR, and your repayments will increase significantly
Discount mortgages are the right choice for some people but not for everyone. For example, if a discount rate was the best on offer at the time, and you could still easily afford your mortgage repayments if that rate were to rise by 1-2%, you might be willing to take that risk, knowing it could go even higher. A broker can help you make that decision.
Discounted mortgage vs fixed
An alternative to a discount mortgage is a fixed-rate mortgage. These usually have a higher rate at the start, and that rate will stay the same throughout the mortgage’s introductory period (usually two, three, or five years). Over that period, the discount mortgage’s rate could change several times. It could stay below the fixed rate, or it could go a lot higher.
So, if you’re choosing between the two, you should ask yourself:
- Are interest rates more likely to rise or fall over the period of time you’re considering?
- How much would your mortgage repayments increase if the rate were to rise by 1%, 2%, or 3%?
- How easily could you afford your mortgage repayments if they were to increase by that much?
- Would the uncertainty over the future of your mortgage repayments worry you?
If you’re not sure how to answer these questions, it’s worth speaking to an expert who can give you more information.
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How a broker can guide if a discount mortgage is right for you
The brokers we work with have significant experience working with mortgages of all kinds and so they can offer you helpful insight that applies to your situation. They’ll provide:
- A perspective on how they would expect mortgage rates to change in the coming years, based on their previous experience
- Calculations for how much your mortgage repayments could change over time with a discount rate
- A recommendation on whether a discount mortgage, tracker mortgage, or fixed-rate mortgage would be best for you now
- Information on the best discounted mortgage rates currently available if that’s the route you choose
As well as this practical help, speaking to a broker can give you peace of mind and a sense of security that you’re making the right decision. If you’d like to speak to a broker who has working knowledge of these types of mortgages, get in touch.
Lenders that offer discount mortgages
Many lenders offer discount mortgages, including Suffolk Building Society, Clydesdale Bank, and Aldermore. As each lender sets their own SVR and discount level, it’s worth spending some time comparing the different deals. If you don’t have a lot of time or you’re not confident that you understand all the variables, it’s best to work with a broker to do this.
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Early repayment fees
When you choose a discount mortgage, you’ll decide whether you want that discount to last for two, three, or five years. At the end of that introductory period, you will usually remortgage to avoid paying the lender’s SVR, which is higher. Lenders usually offer a bigger discount the longer you sign up, so the five-year rate will be lower than the two-year rate.
So, if you choose to remortgage earlier than planned, the lender will need to recoup some of the money they’ve lost by giving you a bigger discount. To do this, they charge an early repayment fee.
This could be:
- A fixed fee
- A set number of months’ interest
- A percentage of the original loan amount
- A percentage of the remaining loan amount
Fixed-rate mortgages also have early repayment fees, and these are often higher than the fees for discount mortgages. Tracker mortgages often don’t have early repayment fees, as the lender doesn’t lose out if you leave early.
Speak to a broker experienced in discount mortgages
Choosing the right type of mortgage can result in savings of hundreds or even thousands of pounds over several years. Choosing the wrong type for you can make it difficult to afford the repayments and, in very extreme cases, can even cause you to lose your home.
To save yourself that worry, seek an expert’s opinion before signing a contract. We work with numerous brokers who can give you all the information you need about discount mortgages and can review your financial situation to help you decide if it’s right for you. To arrange a free, no-obligation chat, call us on 0808 189 2301 or enquire online.
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