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Discounted Mortgages

Everyone likes a discount. Saving money here and there can make a huge difference to homeowners who may be looking to clear their debts or make home improvements.

Discount mortgages may offer homeowners a good deal on their mortgage (for a fixed period at least). Read on to find out more about how discounted mortgages work.

What is a Discounted Mortgage?

A discounted mortgage is a variable rate mortgage which charges a certain amount of interest for a fixed period.

The discounted rate, typically, will be slightly less than the lender’s Standard Variable Rate (SVR) and available for two to three years. However, there are Lifetime Discounted Mortgages on offer, where you stay on the discounted rate for the entirety of the mortgage term. Once the initial discount period is completed, your mortgage may automatically switch to the lender’s Standard Variable Rate.

Alternatively, a discounted mortgage may offer a discount on some of the fees associated with taking out a mortgage.

Am I Eligible for a Discounted Mortgage?

• Discounted mortgages can be good for people who need access to more of their own money at the start of the mortgage term.
• You will need to pass the lender’s affordability checks and have rights to live and work in the UK.

What are the Benefits of a Discount Mortgage?

• Many arrangements may allow you to overpay on your mortgage, without incurring penalty charges (usually a maximum of 10% of the outstanding balance per year).
• The arrangement fees for this type of mortgage may be lower than other types of mortgages.
• Lower rates of interest charged with a discounted mortgage could mean more money in your pocket to make home improvements.

How is a Discounted Mortgage Repaid?

Discounted deals are offered on many types of mortgage including fixed and tracker mortgages. You apply for a discounted mortgage in the same way as any other mortgage. However, with some discounted deals, the mortgage fees may be included in the mortgage loan, which means you don’t have to pay the fees up-front.

Take a look at our Guide to Getting your First Mortgage for more on the costs of taking out a mortgage.

Let’s Look at an Example;

Belinda and Harry are buying their first home and are looking for the cheapest deal available to them. The house they want costs £150,000 and they have found a good mortgage plan. For the first two years, they pay a rate of 3%, which equals a monthly mortgage payment of £711. At the end of the two-year period, their rate switches to the lender’s SVR Rate which is currently set at 5%. This means that in two years’ time, their monthly repayments will increase to £877 per month.

What are the Pitfalls of Discounted Mortgages?

• Even though these deals are advertised as ‘discounted,’ it is possible that you could find a cheaper mortgage elsewhere.
• Some discounted mortgage deals come with exit fees if you wish to switch plans before the discount period ends. These are known as Extended Redemption Penalty Periods.
• There is less security in a discounted deal. For example, you may only be able to get access to the better rate for a short time.
• With discounted deals tied to a lender’s SVR, you may have to pay more every month if the provider’s Standard Variable Rate of interest increases. Your discounted deal may also tie you into the lender’s SVR for a fixed amount of time.
• Some discounted mortgages come with a ‘collar,’ this is the lowest amount of interest the lender will allow you to pay. For those looking for ultra-low interest rates, a tracker mortgage may offer a lower deal (provided the Bank of England base rate stays low also).
• After leaving the discount period, some borrowers may be shocked by the sudden increase in their mortgage bill and the adjustments to their monthly spending budget. 
• It is possible that some lifetime discounted mortgages will only allow you to overpay without charge for a certain period within the mortgage term (for example, the first five years).

What are the Alternatives to Discounted Mortgages?

Fixed Mortgage – These mortgages can offer more security than a discounted mortgage, as you will always know how much your mortgage costs per month. Whereas with a discounted deal, this rate can change. 

Tracker Mortgage – If you’re looking for a low rate of interest, a mortgage which tracks the Bank of England Base Rate may be a better option for you.

Capped Mortgage – These mortgages have an agreed upper limit on the percentage of interest you will pay a month. The interest can fall below and, as a result, you will pay less interest. These mortgages can be great for people who want access to lower rates of interest, but need a degree of security too. 

If you’re thinking about taking out a discounted mortgage, get in touch with an independent mortgage broker. They offer a free quote service and can help you find the best mortgage deal for your needs.