What is a discounted mortgage?

April 18, 2024 by Alan

Property Market

Taking out a mortgage to buy a home represents a significant and long-term financial commitment.

For that reason, it is essential to do some research and try to get the best and most affordable loan you can. That is why so many people choose to seek the help of a professional mortgage advisor when dealing with lenders.

It is certainly a sensible course of action because, to put it mildly, there are a lot of different types of mortgages available. That will make it hard for a layman to know which one is best for them.

One of the mortgage types that a lender can offer to you is a discounted mortgage, but what precisely is that?

A discounted mortgage overview

This type of loan is also sometimes referred to as a discounted variable mortgage. That’s because it’s closely related to the standard variable interest rate (SVR).

An SVR is a rate of interest to be paid on mortgage loans that is set by the lender. That makes it distinct from the base rate, the level of which is decided by the Bank of England.

When a mortgage lender is deciding what its SVR should be, it will be influenced by the current base rate, but it will also factor in any costs that it has.

A discounted mortgage is one where the interest rate to be paid has been set by the lender at a level which is less than its SVR. It will remain below the SVR for a period that is agreed when you first sign up for the mortgage. The interest rate you are paying is not fixed at a single amount for that period though, and could go up or down as the SVR does. It just means that you will always be paying a lower interest rate than the SVR for the duration of the agreed time period.

How discounted mortgages work

To provide an example: a mortgage lender has set its SVR at 4.95% for the moment and you agree a discounted mortgage with a rate 1% below the SVR. That means you will be paying an interest rate of 3.95% per month for as long as the SVR remains the same.

If it goes up to 4.99% while your discounted mortgage deal remains valid, you will then be paying an interest rate of 3.99% a month. The amount you pay can change, but it will always be 1% below the SVR for the agreed time period.

What is the difference between discounted and tracker mortgages?

There are some definite similarities between discounted and tracker mortgages.

The big difference is that what a tracker mortgage follows is generally the base rate set by the Bank of England, in addition to a margin that is set by the lender.

By contrast, discounted mortgages track the SVR of the lender. This means that tracker mortgages often have a lower interest rate and are also usually less subject to fluctuations.

How long will a discounted mortgage deal last?

The standard length of a discounted mortgage deal is anything from two years to five.

Ultimately, the length will be determined by the criteria offered by the lender as well as factors personal to you. These include your credit status and current financial situation.

When the deal comes to an end, you will begin to pay the standard variable interest rate of the lender. That can be avoided if you are able to agree another discounted variable mortgage deal with your lender or an alternative deal with lower interest rates.

Reasons to choose a discounted mortgage

A mortgage of this sort will guarantee you interest rate payments below the SVR for the time period that the agreement lasts. It also opens up the potential for them to be reduced even further if the lender lowers its SVR when the base rate changes.

Discounted mortgages usually come with early repayment charges that are lower than those found with fixed-rate mortgages. That will be good for you if you expect to be able to repay more per month than the required sum.

Reasons not to choose a discounted mortgage

The major issue with this type of mortgage is the potential fluctuations in the interest rates that you will be paying. There is a good chance that your lender will increase its SVR before your deal comes to an end, which will mean the rate that you pay goes up too.

There is also a high potential for your rate payments to change, which can make it harder to set a monthly budget.

Should you speak to someone who has CeMAP mortgage advisor training before deciding?

It can always be a good idea to get professional advice from someone with extensive mortgage market knowledge and experience before you commit yourself to a loan.