In this brief guide, we will discuss how to get discounted mortgage rates.
What are discounted mortgage rates?
Discounted mortgage rates are mortgage rates where the mortgage lender offers a discount on its standard variable rate or the bank of England base rate. For example, if the bank had its standard variable rate at 5% and offered you a discounted mortgage rate of 4% you will receive a discount of 1%. If the mortgage lender then raised its standard variable rate to 6% you will have a mortgage rate of 5%. This is how a discounted mortgage rate works.
If you manage to get a lifetime discount mortgage which means the discount will continue till the end of the mortgage term. In this case, any early repayment charge will be reduced after an initial term based on your mortgage lender.
How do discounted mortgage rates work?
Discounted mortgage rates are a type of variable rate mortgage which either follows the bank of England rate or the mortgage lenders standard variable rate mortgage.
As a discounted mortgage rate is a variable rate mortgage the amount you pay each month could very well change from month to month based on the rate which the discount rate mortgage is tracking. E.g the Bank of England’s base rate or the standard variable rate mortgage
The discounted mortgage rate is usually discounted by 1% or a few percentiles. A discounted mortgage rate is also usually an offer set for a fixed period by the mortgage lender rather than an ongoing rate you will have for the whole mortgage term.
There may be some mortgage lenders who offer a discounted mortgage rate for the whole mortgage term so if you are after such a rate then you should speak to a discounted mortgage rate broker who may be able to find you a suitable mortgage lender.
When you repay your mortgage the monthly mortgage repayment consists of both the interest charge on your mortgage and the capital balance owed on your mortgage. The discount interest rate provides you savings on the interest charged on your mortgage.
A largely discounted mortgage rate doesn’t always mean you are on the best mortgage or you are getting a good deal.
Example a discount of 4% on the mortgage lenders standard variable rate of 6% may seem like a lot but a 1% discount on the mortgage lenders standard variable rate of 3% is a much better mortgage deal.
How long does a discounted variable rate mortgage deal last?
As discounted mortgage rates are simply introductory offers they will usually last between 2 and 5 years and during this period you will usually have a high early repayment charge.
Some mortgage lenders may offer a discounted rate mortgage for the whole term of your mortgage but this is very rare.
Once the deal ends, you’ll be moved to the mortgage provider’s standard variable rate – which will be higher. At this point, you can switch your mortgage to a cheaper fixed-rate mortgage or similar.
Advantages of discount rate mortgages
- If interest rates fall and your mortgage lender decides to reduce its standard variable rate, the interest rate on your mortgage will fall as well.
- Discount rate mortgages usually have low mortgage arrangement fees
- The interest in your mortgage will always be below the mortgage lenders standard variable rate until your discount mortgage term ceases.
- When mortgage rates are generally low, you may find that the discounted mortgage rates are very attractive.
Disadvantages of discount rate mortgages
- If interest rates fall your rates might not even move as, unlike tracker rates the standard variable rate of a lender moves only at the mortgage lenders discretion.
- If your discount mortgage term is only an introductory offer which lasts between 1-5 years. Once your discount rate mortgage is over you will then move on to the lenders standard variable rate which is usually much more expensive.
This means your monthly mortgage payments will rise. You need to be comfortable that you will be able to cope with any potential rise in your monthly mortgage payments before choosing a discount rate mortgage.
- Discount mortgages will usually have high early repayment charges which means you will not be able to remortgage without high costs.
- Discounted mortgage rates usually have a collar rate by which they cannot fall below. In December 2018 around a quarter of all discount mortgages had a collar, according to Moneyfacts. A collar rate could be the rate at which you get your mortgage is originally set at. This means you won’t benefit from any fall in the mortgage rate. For example, if the lender’s SVR is 6% and the discount is 3% this means your initial interest rate is 3%. But if there was a collar rate of 3%, even if the SVR later dropped to 2%, your rate would not go lower than 3%. But in most cases, the standard variable rates don’t have an upper limit cap which means if the mortgage rate rises there is no limit to which your monthly mortgage repayments could rise to.
- A discounted mortgage rate tracks the mortgage lenders standard variable rate this means your mortgage rate can switch at any time and your monthly mortgage repayment could move at any time and from month to month in some scenarios. This may be bad for you if you want to keep your finances on a tight leash.
- If you have a very large discount on your discounted mortgage rate you could find that when your discount mortgage term ends and your mortgage rate moves over to the mortgage lenders standard variable rate you end up with much higher monthly mortgage repayments which may be unsuitable for you if your finances have changed since your mortgage affordability was first assessed by the mortgage lender.
What happens when your discounted period ends?
Once your discounted mortgage rate comes to an end you will usually move on to the mortgage lenders standard variable mortgage which is usually at a much higher mortgage rate than the current discounted mortgage rate which you are paying.
Are discounted mortgage rates right for you?
Discount mortgages are not always the best deal. A suitable fixed mortgage might represent a better value.
If you want certainty with your monthly mortgage repayments then you should seek a more suitable mortgage.
A discounted rate mortgage may also be more suited to people who have a different attitude to risk.
You should consult the services of a suitable digital mortgage broker for mortgage advice.
Using a discounted rates mortgage broker
You may want to consider using an independent mortgage broker to get a mortgage.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases. This could be over 11,000 mortgage products. This may have some advantages than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your remortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy or are satisfied with the mortgage offer for your remortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it, they will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.
In this brief guide, we discussed discounted mortgage rates and how to secure a discounted mortgage rate. If you have any questions or comments please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.