Guide to discount mortgages
Discount mortgages offer a percentage off a lender’s Standard Variable Rate (SVR) for a set period of normally two to three years (although the time period can be longer depending on the deal).
For example, if a lender’s SVR is 4.5% and the discount is 1.5%, you will pay a rate of 3% on your mortgage. With a stepped discount mortgage, your discount changes at one or more set points during the deal period, so you could have a discount of 2% below the SVR in your first year, and a 1% discount in your second year, for example.
Standard variable rate mortgages (SVRs)
After the discounted period, unless you switch onto another deal, your rate will revert to your lender’s SVR. In the past, borrowers were generally advised not to hang around on their lender’s full SVR for too long, as it used normally to be a couple of percentage points higher than the more competitive initial deal rates available and, as a result, made the repayments a lot more expensive.
However, in the current market, unless you have a large deposit or a lot of equity in your property, the most competitive mortgage rates are unlikely to be available to you. Anyone without much equity in their property might be best simply sitting on the lender’s SVR, given that they are relatively low at present.
A mortgage lender can increase or decrease its SVR whenever it wants, so during the discounted period of a mortgage your payments are still liable to fluctuate. You should also bear in mind that if there is a cut in the Base Rate, some lenders may pass them onto the SVR, but it is by no means guaranteed.
So, while your payments may rise in line with the Base Rate, discount mortgages offer borrowers the possibility of benefiting from falling interest rates while also offering the certainty of a cheaper rate than your lender’s SVR, for a set period of time.
The discount tracker mortgage
Discount tracker mortgages work in much the same way as discount SVR mortgages, the only difference being that the discount applies to the Bank Base Rate rather than the lender’s own SVR. Before Bank Base Rate was slashed to its current historic low of 0.5%, many lenders offered a discount off their lifetime tracker mortgages for the first couple of years or more.
For example, if the Base Rate was 1.25% and your mortgage was set to track it at -0.01% for two years, a change in the Base Rate to 1.00% would have made the rate on your mortgage 0.99%. Alternatively, if the Base Rate rose from 1.25% to 1.5%, your rate would have increased to 1.49%.
However, because Bank Base Rate is currently so low, very few lenders are offering discounted trackers.
The stepped discount mortgage
This type of product works in a similar way to a discount mortgage (see above), except the percentage discount changes at several points during the deal period.
For example, you could have a two-year mortgage product that carries a discount of 2% off the lenders’ SVR in the first and 1% in the second year, before reverting to the lenders’ SVR at the end of the deal period. Who should take out a discount mortgage?
Discount mortgages are often popular with people looking to remortgage. People coming off an existing deal will have a bit more experience in the market, and are likely to be in search of a good short-term deal. first-time buyers are, generally speaking, more likely to go for a fixed rate mortgage, as this kind of deal allows you to fix your mortgage repayments at a set level for a certain period of time.
As the interest rate on a discount mortgage is liable to fluctuate, however, borrowers who are looking to stick to a set budget each month may not be entirely suited to this kind of mortgage. Predicting what will happen to the Base Rate is far from easy – in fact, it’s impossible. Cashing in on decreases in this rate, or your lender’s SVR, is certainly something to consider, but remember that rates can go up as well as down.