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While fixed rate mortgages are often the most sought-after deals, there are other mortgage options to consider. A discount mortgage can be an appealing product in many situations.
What is a discount mortgage and how do they work?
A discount mortgage is a type of variable rate mortgage, where the interest rate is set at an amount below the lender’s standard variable rate (SVR). The discount rate might apply for a certain period, such as two or five years, or for the whole mortgage term.
Each lender sets their own standard variable rate, and they can raise or lower it by any amount at any time. Because of that, the amount you pay could change from month to month.
As an example, a lender might currently have an SVR of 6% and the discount is 2%. The interest rate you will pay is 4%. If your lender raised its SVR to 7%, your discounted interest rate would also rise, to 5%.
What are the advantages and disadvantages of a discount mortgage?
Some of the advantages include:
- Lenders do reduce their SVRs at times, which means your mortgage payments will decrease.
- Discount mortgages often have lower initial interest rates than fixed rate deals.
- Most discount products have lower early repayment charges than fixed-rate deals, which gives you better flexibility.
- Some discounted mortgages aren’t limited to a set period, so you could stay on the same deal for years without needing to remortgage.
Disadvantages to consider are:
- Your monthly payments are not fixed. Even a 0.5% rate increase can add a significant amount to your monthly costs.
- It can be harder to budget if your mortgage costs change fairly regularly.
- Many discount mortgage deals have a ‘collar’ that stops your interest rate from dropping below a certain level, which limits the savings.
Who is eligible for a discount mortgage? How do I know if this is right for me?
Each lender has their own criteria for a discount mortgage product, and a good broker will be able to find a suitable deal for most people.
As with any mortgage application you will be assessed on affordability, your available deposit or equity, and the lender will look at your credit score.
Your broker will be able to help you understand if this is a good choice for you. Generally, you should only take out a discount deal if you can comfortably afford for your monthly repayments to increase.
Something else to consider is how you would feel if your lender’s SVR went up, taking your payments up, but there was no change in the Bank of England base rate. Some borrowers don’t like the idea that lenders can alter the rate at any time.
If that’s the case for you, consider a tracker mortgage. This type of product ‘tracks’ the Bank of England base rate and will only increase or decrease when this rate is changed.
What happens when my discount mortgage expires?
Some deals have a set discounted period of two, three or five years. Once you reach the end of this term you will need to remortgage to another lender or take a product transfer with your current bank.
If you do nothing, you will move to the more expensive SVR, which will increase your monthly mortgage costs.
How do I apply for a discount mortgage?
The application process is the same as for any mortgage. A broker will make it simple and easy to get a competitive mortgage deal. We will sit down with you to explore your property goals and personal situation, so that we can recommend a deal that will work for you.
Importantly, we’ll find a lender whose criteria fit your circumstances. Once we have supplied all your documents such as ID and pay information, the lender will do their check and you potentially may be given a mortgage offer. If an offer has been given, we will then complete the paperwork on your behalf and keep chasing everything up until the mortgage is complete.
Why should I talk to a mortgage broker?
It is certainly possible to organise a mortgage direct, but the challenge is to make sure you fit the lender’s criteria, and also to be confident that the deal has the most competitive rates and fees available.
We’re here to help – and make sure you understand exactly what to expect from this type of mortgage and that it’s right for you. Then we’ll recommend the most suitable product from hundreds on the market. We work with First Time Buyers, home movers, people remortgaging and those exploring Buy to Let opportunities.
We’re fully authorised and regulated by the Financial Conduct Authority and registered in England. Contact us for an initial chat about how we can help.