Discount Mortgage
What is a discount mortgage and how do they work?
Discount Mortgages are basically a variable mortgage product. They are in the same group as a tracker mortgage, which may be a little bit more familiar to people.
They are different from a fixed rate mortgage product, where your interest rate and monthly payments stay the same for a set period of time – two years, for example. With a fixed rate deal you wouldn’t see any increase in your monthly payments during that time, until you come to your renewal.
A discount mortgage is variable, so the rate can go up or down with the market. That means your monthly payment can change. A discount mortgage works off the lender’s standard variable rate. In layman’s terms, this is the ‘out of contract’ rate. Once a product finishes, if you don’t do anything to get a new mortgage you go onto this out of contract or standard variable rate (SVR).
A discounted rate is less than that standard variable rate, often by 2% or 1.5% – and it tracks that standard variable rate. So if the SVR goes up when the Bank of England rates go up, so will your discounted interest rate. If interest rates drop and the lender puts down its SVR, your interest rate and monthly payments will fall.
Each individual lender has its own SVR. At the moment it might be around 6.5%, while some are 7% or more. It varies from lender to lender.
Top Rated Discount Mortgage FAQ’s
Discount mortgages have interest rates that vary according to the lender’s SVR, while fixed-rate mortgages offer a constant rate for a specific term, ensuring stable monthly payments.
Discount mortgages offer flexibility, often lower early repayment fees, and the potential to benefit from rate drops. However, as a variable product, payments may rise if the SVR increases.
The main disadvantage of a discount mortgage is the variability of monthly payments, which can increase if the lender’s SVR rises, impacting your budget unpredictably.
A discount mortgage is a variable mortgage product that offers a discounted interest rate off the lender’s standard variable rate (SVR) for a set period. Unlike fixed-rate mortgages, payments can fluctuate based on the SVR movements.
Discount mortgages are generally accessible to any borrower who meets the lender’s criteria, often available through building societies that consider individual circumstances more flexibly than traditional high street lenders.
What are the advantages and disadvantages of a discount mortgage?
A discount mortgage gives you a certain amount of flexibility, in that the early repayment fees are generally quite low around – about 1%. But some tracker rate products don’t have any early repayment fees at all, if that’s something that you’re interested in.
If interest rates drop, because you’re on a variable product you could benefit from that. But that goes hand in hand with one of the biggest disadvantages – as it’s a variable product, if interest rates go up, so will your payments.
Who is eligible for a discount mortgage? How do I know if it is right for me?
Anybody is eligible, as it’s a mortgage product. Most of these discount products sit in the building society world. Building societies often have discount products in their armoury. Some offer trackers as well.
A building society is often a bit more of a common sense underwriter – they will take different circumstances into account. This kind of lender isn’t quite ‘high street’ and is a great option if we want someone to look at your case on an individual basis and underwrite it accordingly. A lot of variable rate mortgages with these lenders are discounted rate.
What happens when my discount mortgage expires?
It’s the same as with any other mortgage product. For example, if you have a two-year discounted rate, you should contact your broker within six months of that product ending. We’ll see what we can do and move you forward onto your next product.
As with any mortgage product, when you come to the end of it you want to avoid going onto that standard variable rate, so it’s definitely time to make some phone calls and have a chat with your broker.
Many discount mortgages have low early repayment charges, creating flexibility if you want to pay off your mortgage sooner, though specifics vary by lender.
Collars limit how low your interest rate can fall, potentially affecting expected savings if overall rates drop below the collar’s threshold.
To apply, discuss your needs with a broker who can explore suitable options like discount or tracker mortgages, depending on your risk tolerance and market expectations.
Consider potential rate increases, early repayment fees, the lender’s SVR, and features like rate collars that might affect your overall costs and flexibility.
Upon expiry, your mortgage might shift to the standard variable rate (SVR). It’s advisable to contact your broker months before to explore more favourable products.
We’re here to make it easy to find the right mortgage for you. If you need help, come to The Mortgage Broker and have that conversation. We’ll work out what’s best for you. You might have an appetite for a little risk and you want to play the market a bit – you think that rates will come down soon and you don’t want to be stuck on a slightly higher fixed rate. We can have a look at discount or tracker mortgages and if they might be right for you. We’ll show you what that looks like in specific terms.How do I apply for a discount mortgage?
What else do we need to know about discount mortgages?
With discounted rates you would normally look at a product length of two years, but there are some three year and five year deals out there.
Just to give an example of deals available today – and these will change frequently – with one lender you could get a two-year discounted rate of 4.5%, which is a discount of 2.7% off the standard variable rate of 7.24%. Interestingly this deal also comes with a ‘collar’ – which is a limit to how low the interest rate can go with that lender. The collar with this is 3%. So it doesn’t matter how low the interest rates go out there, your mortgage rate won’t go lower than 3%.
So if you are trying to ride the market and trying to get the best deal, and you think that rates are going to go low, you need to look at whether the product has a collar. A second example today had a collar of 2%. So your interest rate won’t ever go below that. It doesn’t matter whether interest rates go back to 0.5% from 18 months ago, your interest rate would still stay at 3% or 2% depending on the collar.
Not all lenders will do this, but when I looked at the top two discounted rates available to us here at The Mortgage Broker, they both had a collar. It’s just something to be aware of and to talk to your broker about.
Yes, discount mortgages can be used for buy-to-let, but specific criteria and terms from lenders will apply.
Your initial deposit and property value determine the LTV ratio, affecting interest rates and eligibility. Lower LTVs often attract better rates.
It can suit those with variable incomes if you can tolerate changes in payments due to rate fluctuations, but careful planning with a broker is advisable.
Fees may include arrangement, valuation, and broker fees. Evaluate these alongside interest rate benefits to determine overall value.
If rates rise, your payments will increase. Consider re-evaluating your mortgage options with your broker to manage these changes.
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