Discount Mortgages explained - Apply for a Discount Mortgage
Discount mortgages are often attractively designed property loans which are used by lenders to appeal to new clients. In relation to the standard variable rate, discount mortgages offer a discount on the SVR for an agreed period.
Discounts can vary depending on how much the property is worth and the size of the borrower’s deposit. The higher the property price or the bigger the deposit, the larger the size of the discount.
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Are there different types of Discount Mortgages?
Broadly speaking there are two types of discount mortgage: discount trackers and discount variable rate mortgages. Discount tracker mortgage refers to a discount on the lender’s base rate, while a discounted variable rate takes off a discount from the margin put on top of the normal variable rate set by the lender for a given time period.
Annual Rest Interest
How it works is that your rate of interest increases every day and your mortgage lender divides the annual interest by 365. The amount which you owe the lender can vary depending on the amount of interest accrued every day of the year. The amount you pay your mortgage lender will cover the annual interest figure, unless you have a repayment mortgage where you will also have to pay a percentage of the mortgage loan.
When it comes to daily interest mortgages, interest is calculated on each day’s outstanding balance. This means that as your balance decreases, the interest charge decreases with it. However daily interest mortgages are not without pitfalls. If you fail to make a monthly payment and your mortgage balance grows you will immediately have to pay a greater rate of interest.
Discount mortgages are not fixed rate and the interest level will fluctuate every month - this means that your monthly payments will vary. Also if you find a mortgage which includes a discount, there may be a chance to receive cash back as part of the package. Speak to your lender to discover their discount terms and conditions.
You could also consider a stepped discount mortgage, this has a staggered discount for example in the first year the discount could be 2% off the standard rate and in the second 1%, this has the advantage of not subjecting you to a sudden sharp increase.
Discount Mortgages Pros and Cons:
Discount Mortgage Pros
If you find a mortgage with discount opportunities you can save money which could be used to pay for fittings and furnishings.
Discount Mortgage cons
Be prepared to pay an arrangement fee in the early stages and be aware that you will have to make larger payments when the discount period ends. Redemption penalties for early or late payments frequently apply, so it’s wise to understand your lender’s SVR before signing up.
Think of a discount rate like a short term special offer, given to you by the mortgage lender in order to suck in your custom. The rate is much cheaper than normal, usually for two to five years, though you will often need to agree to pay a hefty penalty if you want to pay off the mortgage or switch to a new mortgage deal within that time.
A discount mortgage is variable rate mortgage in effect so it carries many of the advantages and disadvantages of this type of mortgage. A discount mortgage is likely to fluctuate so if, as a borrower, you want security then a discount mortgage is not suitable for you and you should consider a fixed rate mortgage.
Top Tips shopping for Discount Mortgages!
When shopping for a discount rate remember to pay close attention to the underlying rate rather than the discount otherwise it could cost you more in the long run when the discount period is over. The standard variable rate is the rate of interest that the borrower will have to pay once the discount period is over. Although you could remortgage after the discount period it is likely that there will be large penalty charges for doing so, to stop customers taking advantage of the introductory offer and then leaving.
Discount rate mortgages are popular with first time buyers because of the low introductory rate, particularly important for the first purchase of young homeowners when you consider the other expenses associated with buying property. But remember that standard variable rate will fluctuate, meaning that even in the discounted introductory period your payments could rise. Discount mortgages aren’t necessarily the cheapest option in the long run so it is important to pay close attention to the base rate and decide whether or not the short term benefits are worth it.