Exploring discount mortgages with Adrian McGlennon.
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 [podcast recorded in March 2023] it might be around 6.5%, while some are 7% or more. It varies from lender to lender.
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.
Our job as a mortgage broker is to source the market for the best options for you. Our experience and depth of knowledge can help you to secure that all-important mortage at the best rate we can.
How do I apply for a discount mortgage?
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.
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.
Your home may be repossessed if you do not keep up with your mortgage repayments.