Discount Mortgages Explained

What is a discount mortgage and how does it work?

Every lender has a standard variable rate (SVR), which you’ll be switched to after your initial deal comes to an end. For example, you may have taken out a mortgage with a fixed-rate deal for 2 years. Your rate will automatically change to the lender’s SVR unless you remortgage to a better deal. An SVR is usually based on the base rate set by the Bank of England – although it isn’t tied to it – as well as the lender’s costs. How much is charged for an SVR and when the rate can change is decided by the lender. This type of rate tends to be higher than other variable rates.

A discount mortgage has an interest rate that’s set at a percentage below the lender’s SVR. As it’s a variable rate, it can up and down, which will affect your monthly payments. However, it will always be lower than the SVR. For example, the lender may have an SVR of 5% and your discount is set at 2% below the SVR. This means that you’ll pay an interest rate of 3%. If the SVR increases to 6%, however, the rate you’ll pay will increase to 4%. Although you’ll be paying more than before, you’ll still benefit from the 2% discount on the SVR. It’s important to understand that if the interest rate goes up, causing your monthly payments to increase, you won’t be repaying a higher amount of capital — you’ll only be paying off a higher interest rate.

Options for a discount mortgage deal

You can choose to have the discounted rate for a fixed term, such as 2, 3 or 5 years, or for the entire mortgage term. As each lender sets their own SVR, there can be significant differences between the amounts payable for deals with the same discount percentage. Lenders offer different term lengths for the discounts as well as different discount amounts. Our mortgage brokers can compare the discount mortgage deals available to help you decide on the best one for your needs.

What savings can you make with a discount mortgage?

Various factors affect the savings you can make with a discount mortgage. These include the size of your mortgage loan, how long you choose to have the discounted rate for and the discount that’s been agreed upon. If interest rates are generally low, you may benefit from significant savings compared with other deals. However, as SVRs tend to be higher than other rates, it’s recommended to check the SVRs and discount rates offered by different lenders to get a clearer idea of the savings you can make. A comparison with other types of mortgages is recommended too for the same reason. A tracker mortgage or fixed rate mortgage, for example, may be cheaper than a discount mortgage because of the SVR. 

Check if the lender has set a collar

Some lenders set a collar, which is a rate that your interest rate is prevented from falling below. This measure limits the savings available to you when interest rates decrease. Despite setting a collar to stop your rate from going too low, limits don’t tend to be set for how high your interest rate can reach. If the SVR increases significantly, therefore, so could your mortgage payments.

What happens at the end of the discounted period?

The discounted mortgage rate is usually applied for a short term, such as 2, 3 or 5 years. However, you can opt to have it for your entire mortgage term, such as 25 years, which is known as a lifetime discount mortgage. Just bear in mind that the longer the discounted period, the lower the discount tends to be.

For a shorter discounted period, your deal will automatically transfer to your lender’s SVR when it comes to an end. This means that your monthly payments will increase straight away. To avoid this, shop around for a better deal a few months before the discounted period ends. You may be able to secure a new deal with your existing lender or remortgage via a different lender. Compare all of the options available to you. For example, you may wish to have a new discounted rate or prefer to change to a tracker mortgage. Or, having tried a variable rate mortgage, you may prefer the stability of a fixed-rate deal instead. These deals often have a higher interest rate because they provide the security of having a set rate for a fixed term.

Get expert advice on discount mortgages

Get in touch with our mortgage brokers – located throughout Kent, London and Edinburgh – to discuss discount mortgages in more detail and ascertain if this option is a good fit for your needs. They can check the SVRs, discount rates and terms with different lenders for a full comparison of the deals available to you. They can also check other mortgage options to help you decide whether a discount mortgage is the best choice for your circumstances and requirements. When you’re ready to proceed, your dedicated mortgage broker will prepare your discount mortgage application and present it to the chosen lender. They will then oversee the application process from start to finish to ensure that you benefit from a smooth transaction.

At Trinity Finance, we can also help with other aspects of the home-buying process. These include arranging your home insurance, indemnity insurance and mortgage payment protection insurance. We also offer other financial products, such as life insurance, critical illness cover and income protection. Just give us a call on 01322 907 000 or email us at info@trinityfinance.co.uk for further details. Alternatively, send an enquiry via our contact form and one of our mortgage and protection advisers will reply to you as quickly as possible.

The advantages of a discount mortgage

There are various advantages to having a discount mortgage:

• For the term of the deal, your interest rate will remain lower than your lender’s SVR.
• The rate you pay may be lower than the rates available with other variable-rate deals because of the discount.
• A discount mortgage tends to have a lower interest rate than a fixed rate mortgage.
• If your lender’s SVR decreases, you’ll benefit from making lower monthly payments.
• The early repayment charges applied by lenders for discount mortgages tend to be lower than those for fixed rate mortgages.

The disadvantages of a discount mortgage

There are also some disadvantages to consider before choosing a discount mortgage:

• As the rate you pay tracks the lender’s SVR, it can change at any time. If the lender increases the SVR, your monthly payments will increase too. Lenders can change their SVRs by any amount and without any notice, making it extremely difficult to budget for your monthly payments.
• The lender may have set a collar, which means that your interest rate cannot fall below this. This minimises how much you can save with a discount mortgage.
• When your discounted deal ends, your rate will automatically switch to the lender’s SVR unless you have arranged a new mortgage deal. Lenders’ SVRs can be high and if you’ve benefitted from a large discount, you may have to pay a significant amount more when your deal ends.
• Lenders usually apply early repayment charges to discount mortgages. This means that you may have to pay a hefty fee if you wish to end your deal early.

Considerations when applying for a discount mortgage

Your rate can increase

As a discount mortgage has a variable rate, make sure that you can comfortably afford your monthly payments should the rate suddenly go up. Remember that the rate tracks a lender’s SVR and lenders can change their SVRs whenever they wish and by any amount. If you’d rather be able to budget for your monthly payments or have peace of mind that they won’t keep increasing, a fixed rate may be a better option for you.

Fees to pay

There are various costs to consider when applying for a discount mortgage so bear these in mind rather than just looking at the discounted rates available from different lenders. These costs can include an arrangement fee, an early repayment charge and an exit fee.

• Arrangement fee: This is charged by the lender as an administration cost for arranging your mortgage.
• Early repayment charge: Some lenders charge a penalty fee if you either leave your deal before the tie-in period has ended, make an overpayment that hasn’t been agreed upon or repay your entire mortgage loan early. This fee can be a fixed amount, a set number of monthly interest amounts or it can be calculated as a percentage of either your outstanding loan balance, the original loan amount or the amount that you’ve already repaid of your loan.
• Exit fee: This fee is charged by many lenders when you have repaid your mortgage loan. It covers the cost of closing your mortgage account.

Our mortgage brokers can check these costs for you with each lender. Whilst the discounted rate may look very attractive with one lender, for example, their fees may be very high compared with another lender.

Is a discount mortgage right for you?

Having a discount mortgage is a great way to benefit from a cheaper rate than some other mortgage options. This allows you to save money when making your monthly payments compared with other deals. However, if the lender’s SVR increases, so will your monthly payments. You should only consider a discount mortgage if you can be sure that you can cover any rate increases. If you’d rather have a variable rate that tracks the base rate instead of the SVR, choose a tracker mortgage instead. If you’d rather have the security of knowing how much you have to pay each month, then opt for a fixed rate.

Benefit from a reduced rate with a discount mortgage

Our mortgage brokers – located throughout Kent, London and Edinburgh – are ready to help you decide whether a discount mortgage is the right option for you. They will check your circumstances and discuss your requirements before searching for the best mortgage products available. With access to exclusive broker-only deals, they will compare the different discount mortgage deals offered by lenders. The interest rates, fees and discount terms will all be checked to ascertain the savings you can make. As well as that, our mortgage brokers will take a look at any alternative options available that they feel may be better suited to your needs. Just give us a call on 01322 907 000 to speak with one of our mortgage consultants and get the ball rolling with your application.

At Trinity Finance, we can also arrange your buildings and contents insurance and offer a range of financial protection products. These can give you peace of mind that you are financially protected should the unexpected happen. For more information, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. One of our mortgage and protection advisers will reply to you as quickly as possible with further details.