What Is A Discounted Mortgage

What Is A Discounted Mortgage

18 Jan 2024

A discounted variable mortgage is a type of mortgage which offers a set discount to the lender's standard variable rate (SVR) for a fixed period of time, also called the deal period. These are available for 2,3 or 5 years, and sometimes you may get others for different lengths. In the earlier years, the long-term impact on the cost due to small differences in rate presents good value for money.

What Is A Discounted Variable Mortgage?

The discount mortgage is a variable rate mortgage, where the rate fluctuates each time the lender changes the SVR. It means the monthly mortgage payment fluctuates during the deal period. All mortgage lenders have a standard variable rate SVR, an interest rate set at their discretion.

The BoE base rate influences the SVR. In the case of a fixed or tracked mortgage, when your deal comes to an end, your plan is to get a mortgage and will revert to an SVR mortgage unless you remortgage.

How Do Discounted Mortgages Work?

A discounted variable rate mortgage is like a tracker that tracks the SVR at a discounted rate instead of tracking the external base rate. The discount rates are just variable rates with a discount for a fixed period; for example, if you are offered a variable rate of 4 per cent and a two-year discount of 1 per cent, then you pay 3 per cent for two years and revert back to the variable rate once the 2-year period comes to an end.

As with the variable rates, the lender can change the underlying rate at any time, altering the payments up or down. The changes are likely to follow the Bank of England Base Rate.

There are high-risk products where you get normal mortgages, and there are others with early repayment penalties during the discount period, with no upper limit on the rate. It means the rate could rise steeply without warning, and one may have to pay a sizeable penalty to escape the deal or change to a fixed rate.

One may find the discount rates are the cheapest in the marketplace, but they can be riskier than trackers due to the lender controlling the rates. These can be riskier than the fixed rate products where the rates cannot change initially. 

For instance, the Bank of England's base rate dropped to the lowest. Yet, most lenders' variable rates went up during the credit crisis, and any customer on the discounted mortgage must have lost out significantly in such tracker rates or even fixed mortgages. 

Also, the discounted products come with early repayment penalties, and the discount ends once the discount period finishes.

What Is A Discounted Mortgage Rate?

It is a type of mortgage where the lender provides a discount on the standard variable rate - SVR for a fixed period of time, and once the period ends, you pay the more costly SVR unless you remortgage onto a better deal.

It is a type of variable rate mortgage where the lender provides a discounted interest rate based on the SVR for a fixed period. It means you will be placed onto the lender's SVR when your initial mortgage ends unless you remortgage.

What Is A 2-Year Discounted Mortgage?

Like the SVRs, the duration of a discounted variable rate mortgage varies among lenders, which is determined by the prevailing offer from the mortgage provider. Discount rate mortgages last for two to five years, and a 2-year discount mortgage deal is one where the interest rate is set at a discounted level below the standard variable rate for two years.

What Is A Lifetime Discounted Mortgage?

A lifetime mortgage is just like a conventional mortgage, where you borrow against the home's value. It is a type of equity release product that allows homeowners aged 55 and over to borrow money against the value of their property while still living there and maintaining ownership.

The loan is not required to be repaid until the homeowner goes into long-term care or dies. The youngest homeowner must be 55 or over. The scheme is designed for lifetime loans where the interest increases over time, and the only difference is that there are no obligations to make monthly payments, though there are conditions where you can choose to pay monthly.

It provides the option to pay some or all interest and make repayments to reduce the total loan size. You can make monthly payments, but it is an option; there are no penalties if you stop making the payment in future.

If you do not choose to make the monthly payment, you will be obliged to pay the full amount and the interest when the homeowner dies or is sent to long-term care or the mortgage is cleared through the sale of the home.

There can be two types of lifetime discounted mortgages – the lump sum lifetime mortgage allows you to release a one-off tax-free cash lump sum from the value of the home and gives you the option to spend all the money you release at once. Also, you can fix the interest rate for life and make voluntary payments.

A drawdown lifetime mortgage is a popular choice for those who want to lower the cost of borrowing. You only pay the interest on the funds drawn, and you only need to pay interest on the money once you choose to use it.

What Is A Discounted Mortgage Example?

If the customer has a discount of 0.5% until October in a year, and in January, the lender variable rate is 2%, the customer pays 1.5%. The discount rate depends on the BoE rates, so the lender can choose not to pass the change even in case of a reduction in the BOE rate. Once the discount period ends, the customer can revert to the lender's main variable rate once the discount period ends. 

Most discount rates are offered for 2, 3 and 5 years; sometimes the other length may be applicable. It means that in earlier years of the mortgage, the long-term impact on cost due to relatively small differences in rates has the highest effect, and it can present good value for money. 

What Is A 5-Year Discounted Mortgage?

A 5-year discounted mortgage offers a discounted rate for five years. If you wish to switch your mortgage deal or move house during the fixed discounted period, you may be asked to pay the early repayment charges. It is a good idea to check the terms and conditions to see how much the lender charges. Short fixed terms on a discount mortgage offer larger discounts than those over a longer term.

Advantages And Disadvantages Of A Discounted Mortgage

All lenders have a standard variable rate, the rate you choose to move onto at the end of the initial variable or fixed rate period. A discount rate mortgage tracks the SVR at a discount. So, if the lender's SVR is 5 per cent and the discount is 2 per cent, the interest rate on the mortgage will be 3 per cent. 

If the lenders set their SVRs, it can vary significantly. The lenders offering a 2 per cent discount may charge a different rate. Also, the size and length of the discount will vary between lenders and the loans. 

The discounted rate mortgages are not the best option when there is a likelihood of an increase in interest rates. A discounted mortgage can be a poor choice if one cannot afford the risk of a rate hike or benefits in terms of costs compared to the fixed rate.

Discounted Mortgage Rates UK

Discounted mortgage rates have several advantages - You pay a lower interest rate than the lender's SVR for as long as your deal lasts. It is possible to pay even a lower interest rate if the lender reacts to a change in the Bank of England base rate by lowering the SVR.

You will likely pay lower early repayment charges than fixed-rate deals, which may help you pay less in fees if you decide to overpay each month to pay off the loan on time.

Discount-rate mortgages are cheap but are the highest-risk products for most normal mortgages. They tend to come with repayment penalties during the discount period, and there is no upper limit on the rate. It also means the rate could rise steeply without prior notification, and one may have to pay a huge penalty if one wants to change to alternative fixed-rate deals. 

Customers should be careful not just to select the products because they are cheap but also to be careful and aware of the risks.

Principality Mortgage Rates

The Principality Building Society has brought in the 5.45 per cent three-year fixed-rate mortgages for loans up to 75 per cent of the valuation. After the fixed rate period, the mortgage changes to the Principality standard variable rate.

The rate was 6.7 per cent on April 23, 2001, and the mortgage has a redemption penalty of 2.5 per cent of the advance for the fixed rate period. Also, you must pay the compulsory building and content insurance and an administration fee ( £299). 

What Is The Difference Between A Tracker And A Discounted Mortgage?

In the case of a tracker mortgage, your rate follows the bank base rate set by the BoE, and the rate changes only when the base rate does. But with a discount rate, the rate can change anytime as the lenders adjust their SVRs whenever they like. 

It is not just the frequency of rate change but the size. The lender could increase the SVR substantially, meaning a significant increase to the monthly bill.

Also, it has been found that discount rate mortgages come with early repayment charges where you pay for early repayment and also in situations when you want to remortgage to a new deal. 

It is estimated as a percentage of the amount that is repaid. So, if you find the interest rate is moving higher, you will have to pay a significant amount if you plan to move to a different product. 

So, the main difference between discount variable mortgages and tracker mortgages is that tracker mortgages track the Bank of England base interest rate with a margin added by the lender, which means they often have the lowest interest rates available.

Discount variable mortgages track the lender's SVR; although they are cheaper than SVR mortgages, they can change unexpectedly, whereas the tracker mortgages won't change so often. 

Discounted-rate mortgages are considered bad when there is the likelihood of an increase in interest rates. It can be difficult to determine this, but there are risks involved. If you cannot afford the rise in rate or benefit in terms of cost compared to fixed rates, then discounted rates are unsuitable. 

In certain situations, if the most competitive tracker products are similar in cost, even then, the additional risks of the discount deal will not weigh up as there are early repayment penalties, which makes it less suitable for those who want to move home or sell the property during the discount period.

Fixed Mortgages Vs. Discount Variable Mortgage

Discounted variable mortgages are less popular than fixed rates, with few discounted mortgage rate options. To search for discounted mortgages, you can use a mortgage comparison site. 

A discount rate mortgage interest rate charged is often lower than the fixed rate on offer. With a fixed-rate mortgage, borrowers are charged a premium as they know their monthly repayments. 

If you get a discount mortgage with a lower rate than a fixed mortgage, you will have small monthly repayments, but there can be uncertainties with a discount rate mortgage compared to other mortgages. 

How Long Does A Discounted Mortgage Deal Last?

A mortgage offer confirms the lender will give you the money needed to buy a home. It is different from the agreement in principle, which gives you an idea of how much money you can borrow from a particular lender if you decide to go through the application process and get approval.

An agreement, in principle, does not involve a full credit check or affordability assessment and is not related to a particular property. A mortgage offer is a temporary commitment from the lender to complete a mortgage transaction.

With the offer, the borrower can still determine whether or not to go through the property purchase or get the mortgage. Getting a mortgage offer within a few days of the application may take two to four weeks. One can get an idea by contacting an independent mortgage broker

It is a formal contract that contains the buyers' personal details, the terms and conditions of the mortgage deal, and the information related to the purchased property. 

A mortgage offer is provided once you have completed a mortgage application and met the lender's affordability criteria, which include income and credit checks.

Mortgage lenders conduct a valuation of the property you plan to buy and ensure that the mortgage loan is equal to the value of the property and that the price you are paying is in line with the market average. 

You can get a mortgage for three to six months; for newly built properties, the mortgage offers are valid for up to nine months. However, it depends on the lenders' terms, as different lenders have different criteria for estimating the validity from the same point.

The mortgage offer will state when the offer expires. Some use the date in the offer on the property, and others may calculate from the mortgage application date. 

It is the rate for the mortgage lender to withdraw a mortgage offer, but one can withdraw even after the contracts have been exchanged. 

The lender may withdraw a mortgage in case there has been a material change in the circumstances since the application was given, or if it discovers the client has not been honest in the application, or in case there have been changes to the condition, title, value of the property or if the property has been evaluated for a lower amount, if the client is convicted of a serious criminal offence or if the lender has stopped lending for some reason or if the mortgage offer has expired. 

The interest rates of the Bank of England have been rising since 2021, but if a lender has given a mortgage offer, it cannot withdraw just because the interest rates are rising or if its own mortgage rates are rising. 

The lenders have an actual date when the application process is completed, and it is important to clear the validity rules before signing the offer. 

Depending on the type of property, the buyers can seek an extended offer period and ask the lenders to calculate from the completion of the construction date. 

You can even get a lifetime discount mortgage where the discount to the lender's standard variable rate applies to the life of the mortgage instead of a fixed term such as two to five years. Lifetime mortgages require extra consideration as they are long-term commitments.

Is A Discount Mortgage A Good Idea?

A discounted mortgage can be a good idea in situations where the SVR is low as you secure a low rate of interest. But SVRs are not fixed, which means interest rates increase every time your lender increases the SVR. 

One must check the terms of the deal as they are terms applied to see how low the interest rate can go; if the SVR drops, you may not gain from better rates and lower repayments. 

In many situations, lenders rarely have a cap on the amount of interest one pays in case SVR increases, and there may be no way to prevent interest rates from escalating with it. Some Companies provide Mortgage Lead Generation Services.

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