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Discount Mortgages

 

Saving money on your mortgage

As with items on sale in a shop, discount mortgages offer a certain amount off the price of a home loan. But the discount is applied to the lender's Standard Variable Rate (SVR) for only a specified period of time.

For example, you might be offered a one percentage point discount off the rate for two or three years. So if the SVR is 5% and the discount you receive is one percentage point, you'd receive a rate of 4%. Once the deal has expired, you'll be moved onto the lender's SVR but you can choose to move off this whenever you want and find a better mortgage deal elsewhere.

Although discount mortgages can look competitive, be aware that it will follow your lender's SVR so if that rises or falls, your repayments will echo those moves – minus the discount off the rate you are getting. So if the SVR moves up from 5% to 6%, your discount mortgage will move from 4% to 5%.

EXAMPLE – What happens if your discount mortgage rate rises

You have a mortgage of £150,000 on a discount mortgage at 4%. Your monthly repayments are £792 over a term of 25 years.

But if your discount mortgage rate rises to 5%, your monthly repayments will increase to £877 – that's £85 more a month, or £1,020 over a year.

And if your discount mortgage rate rises to 6%, your mortgage repayments will go up to £966 a month – that's £174 more than when your rate was 4% or £2,088 a year.

If you want to move from a discount mortgage before the term is up, you are usually subject to costly fees and charges. For example, if you had a three-year deal, you might have to pay a fee of 3% to get out of it – if you had a mortgage of £150,000 this would make your fee £4,500. Therefore, you should only take out this type of mortgage if you can afford for your monthly repayments to go up so that you don't have to get out of your deal early. If you can't afford for your repayments to rise, you may be better off choosing a fixed-rate mortgage instead, particularly if it seems as though rate rises are looming.

Discounted deals are less popular these days than they were, mainly because they've largely been superseded by tracker deals.

Should I choose a discount mortgage with a lower SVR or a higher discount?

It can be difficult to compare discount mortgages because you need to look at both the discount and the SVR of the lender. If the SVR of the two lenders is quite similar, it could be a good idea to go for the lender offering the largest discount.

EXAMPLE

Borrowing £270,000 over a 25-year period.

Lender A has an SVR of 5.99% and offers a mortgage with a discount rate of -2.99%, bringing the rate to 3%.This means your monthLy repayments would be £1,280

Lender B has a lower SVR of 4.19% but offers a smaller discount rate of -1.29% taking the total rate to 2.9% and giving it a cheaper rate than the lender A. Your monthly repayments would therefore be slightly lower at £1,266

However, if the lender B moved its SVR to 5.29%, it would still have a lower SVR, but the smaller discount would mean it then charged customers much more than the lender A at 4%. Monthly repayments would therefore be £1,425

How do I know if an SVR is going to rise or fall?

A lender's SVR can change at any time and is affected by a number of factors. You should keep an eye on two rates that could affect a lender's SVR. One is the Bank of England base rate which sets the rate at which providers can borrow from the central bank. The second is the London Interbank Offered Rate (LIBOR) which is the commercial interest rate at which banks lend to each other. If either of these rates rise, the cost of borrowing can also go up for customers. This is because banks and other providers borrow to partly fund mortgages for their customers and if this becomes more expensive, the cost is usually passed on to customers through raising rates, such as the SVR. Unfortunately, it doesn't always work the other way round. So if base rate and the LIBOR rate goes down, lenders may not pass through the full decrease to their customers.

It's worth checking how the lender's SVR and compares with other providers, as rates tend to follow a market pattern. If your provider's SVR seems lower than others, it could mean a rate rise is imminent – though, of course, not necessarily. You should also ask the lender when it last raised rates and by how much as it could be indicative; but again, not always.

  1. Discount mortgages offer a discount off the SVR
  2. The interest rate can rise at any time
  3. You'll have to pay a penalty if you want to get out of the deal early

Only choose a discount mortgage if you can afford for your repayments to rise at any time

 

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  • Base Rate Tracker
  • Discount
  • Offset
  • Remortgage
  • First Time Buyer
  • Buy to Let
  • Fixed Rate
  • Lender
  • Initial rate & duration
  • Standard rate
  • Overall cost for comparison
  • Max loan to value