Borrowers who are looking for a new mortgage – whether to purchase a property or remortgage from their existing deal – have no shortage of options.
Recent data from financial analysts, Moneyfacts.co.uk, found that there are now more than 3,890 mortgage products available.
That’s an astonishing level of choice for a borrower attempting to pin down the right rate for their circumstances.
The vast majority of those mortgage products will offer a fixed rate. Recent years have seen fixed rates become the dominant choice for borrowers; the ability to fix your rate at record low levels – and for significant terms – have held an obvious appeal.
But it’s worth noting that there are other options which might work for borrowers beyond the traditional fixed rate.
Don’t ignore discount mortgages
A perfect example is the discount mortgage. They aren’t particularly well-known and are not offered by a wide range of lenders. Nonetheless they can present a useful option for some borrowers.
The name comes from the way in which the rate is set. All lenders operate their own standard variable rate (SVR) – it’s the rate you move onto after your initial fixed or variable deal comes to an end.
And it’s a rate which the lender can change at any time, irrespective of what’s going on with bank base rate.
A discount mortgage tracks that SVR at a discount, for example 1% below the SVR. As a result, when the SVR goes up, so too does the rate, but when the SVR is reduced the rate the borrower pays on their home loan will also fall.
Why discounted mortgages are worth considering
In years past, there was little obvious benefit to a discounted mortgage. The fixed rates on offer were so low that for many borrowers it made far more sense to lock into a lengthy low rate, rather than opt for a discounted deal which might deliver a marginally lower monthly payment, initially, but which could swiftly end up more costly should the lender raise their SVR slightly.
However, the interest on fixed rates have risen sharply this year. In fact, Moneyfacts revealed in August the average rate charged on a five-year fixed rate surpassed 4% – the first time this has happened since 2013.
Similarly notable hikes have occurred on fixed rate deals of other terms.
Yet what’s really notable is that, typically, SVRs have not increased by the same margin. That has meant that the gap in monthly repayments between discounted mortgages and fixed rate mortgages is now more pronounced, with borrowers on discounted mortgage deals required to make smaller payments at the outset.
Obviously, we don’t have a crystal ball, so can’t predict precisely what will happen with SVRs in the years ahead. It may be that SVRs are hiked more severely in the months and years ahead, meaning borrowers have to dig deeper to cover the larger repayments they face.
But if lenders keep their SVRs within 2% to 3% of bank base rate, as has historically been the norm, then it may well be that discounted deals work out cheaper over a two-year period – and potentially even longer – for borrowers who opt for one.
Are discount mortgages right for you?
It’s important to emphasise that discounted rate mortgages won’t be a suitable option for everyone.
Many borrowers prefer the certainty of knowing exactly what they are paying each month, the security it provides when it comes to working out their monthly budgets.
As a result, they are content not to take their chances over interest rate changes, secure in the knowledge of exactly how much will be leaving their account each month.
Equally, some of the lenders offering these deals tend to err on the side of caution when it comes to their lending criteria.
That means they focus on borrowers with spotless credit records, so if you have the odd blemish then even being willing to take on the additional risk that comes from a discount mortgage may not mean that they are a realistic option.
But there will be other borrowers, with a different attitude to risk, or a more dovish view on future rate rises for whom discounted mortgages are worth real consideration.
That’s where utilising a quality mortgage broker can prove so useful. Brokers can work with you to help you identify not just the lowest rate you might qualify for, but the most appropriate form of mortgage for your own circumstances and attitude to risk.
What’s more, some lenders only offer their deals through brokers, meaning that you benefit from a wider range of options.
Richard Campo founder of Rose Capital Partners
