Find out what a discount mortgage is, also known as a discounted-variable mortgage, as well as the benefits and drawbacks, and determine whether or not this sort of mortgage could be the best option for you.
What exactly is a mortgage at a discounted rate?
A discount mortgage is a type of house loan in which the interest rate is locked in at a predetermined level that is a predetermined amount lower than the lender’s standard variable rate (SVR) for either a predetermined length of time (such as two or five years) or for the entirety of the loan.
The standard variable rate, often known as the SVR, is an interest rate that is determined by your lender and can be increased or decreased at any time and by any amount.
The amount that you owe on your mortgage could shift from one month to the next if you have a variable-rate mortgage product known as a discount mortgage.
How exactly do
Discount mortgages
function in practise?
When you make a payment on your mortgage, some of the money goes toward paying off the interest that your lender has assessed, while the remaining portion goes toward paying off the principal amount that you have borrowed.
The interest you pay will be the only thing you have to worry about when it comes to saving money with a discount mortgage.
If a lender has an APR of 5% and the discount is 1%, then the interest rate you will pay is 4%. This is because the APR and the discount are both multiplied together. If your lender were to increase the SVR on your loan to 6%, your discounted interest rate would likewise increase, in this case to 5%.
If the interest rate on your mortgage loan increased, your monthly mortgage payments would also increase; however, you would be paying more interest than you would be repaying of the principal amount of the loan.
How much money can I save by getting a mortgage with a discount?
When interest rates are historically low across the board, discount mortgages have the potential to be quite competitively priced.
On the other hand, they may come with a ‘collar,’ which refers to a predetermined pace that they are unable to fall below.
There are some collars that are fixed at the rate that you are already paying at the time that you enter into the transaction. This means that you will not benefit from any reduction in the SVR that your lender may implement.
For instance, if the lender’s SVR is 5 percent and they provide a mortgage with a 3 percent discount, this indicates that your starting interest rate is 2 percent despite the fact that the lender’s SVR is 5 percent. However, if there was a collar of 2 percent, your rate would not go lower than 2 percent, even if the SVR later dropped to 3 percent. The collar would prevent this.
However, the majority of discount offers do not have an upper limit, which means that your payments may become much more expensive if the SVR continues to rise.
What will happen when your promotional period comes to an end?
In most cases, discount mortgage arrangements are made available for a predetermined period of time ranging from two to five years. The tendency is that the amount of the discount will decrease as the duration of the discounted period increases.
When this period of time expires, your lender will typically move you immediately onto the SVR that it uses for new borrowers. Because of this, your regular payments will become more expensive because the interest rate that you are required to pay will be increased.
At this stage, switching to a new mortgage offer will typically provide the best results for your financial situation.
The advantages and disadvantages of discount mortgages
The advantages and disadvantages
Pros
Throughout the entirety of your term, your rate will be lower than the SVR offered by your lender.
It is possible that the interest rate you are required to pay will be quite low if the economy is in a given state (for instance, if SVRs are generally low as a result of the Bank of England base rate).
Cons
Your lender’s standard variable rate (SVR), which is tracked by your discounted interest rate, is subject to fluctuate at any moment and by any amount, which means that your monthly repayments may not remain the same from month to month. A mortgage with a fixed interest rate can be the best option for you if you have a limited budget and want to ensure that your monthly payments do not change.
Your reduced interest rate may be subject to a collar with a discount mortgage. This means that your discounted rate cannot fall below a particular percentage, which limits the amount that you profit from decreases in the SVR.
When the term of their arrangement comes to an end, borrowers who have received significant discounts may find themselves in a particularly precarious position since they may be subject to a significant and unexpected increase in their interest rate if they are shifted to the lender’s SVR.
Do I qualify for a mortgage at a discounted rate?
Qualify for a mortgage
When contemplating whether or not to go with a discount mortgage, it is important to evaluate your comfort level with taking risks.
If the beginning interest rate on a discount mortgage is significantly lower than the beginning interest rate on a fixed-rate mortgage, and if you believe that interest rates will remain low for the next few years, you may elect to accept the risk in order to potentially save money.
However, if you expect the amount of your interest payments to remain consistent into the foreseeable future, a discount arrangement will not offer you the assurance that you require for the course of the loan’s lifetime.
Is it a smart time to get a mortgage with a discount right now?
Due to the fact that promotional offers are tied to the lender’s SVR, you should evaluate the chance that the SVR will rise over the course of the next several years.
The base rate that the Bank of England uses to calculate its SVR is one of the many factors that might affect a lender’s standard variable rate.
The Monetary Policy Committee is responsible for determining each month’s base rate with the intention of preserving an inflation rate of approximately 2%. Lenders have a tendency to increase their interest rates in response to an increase in the base rate; conversely, when the base rate decreases, lenders may also pass this benefit on to consumers, but not always to the same level.
