If you have received an offer for a discounted variable rate mortgage, you may be curious about how it stacks up against other mortgage options.
Essentially, these mortgages are somewhat in the middle of tracker mortgages and SVR mortgages in terms of appeal.
While your interest rate may fluctuate and result in a more costly mortgage, it typically won't be quite as costly as it would be with an SVR mortgage.
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What Is A Discounted Variable Mortgage
Most mortgage lenders have an interest rate known as the standard variable rate (SVR), which they set at their own discretion.
Although the Bank of England base rate has an impact on it, the SVR is not linked to it. When your fixed or tracker mortgage deal ends, you will automatically switch to an SVR mortgage if you do not remortgage.
On the other hand, a discount variable mortgage offers an interest rate lower than the lender's SVR for a specific period. Your interest rate is not fixed and will vary based on any changes in the lender's SVR.
How Does A Discounted Variable Mortgage Work?
A discounted variable rate mortgage functions similarly to a tracker mortgage, except it follows the lender's SVR at a reduced rate.
Let's say your lender's SVR is 5%, and you have a 1% discount. In that case, your interest rate will be 4%. If the lender increases its SVR to 6%, your interest rate will be 5%.
However, it's essential to note that your lender can change its SVR at any time, making it challenging to plan your future budget.
Discount vs Tracker Mortgages
As mentioned previously, discounted variable mortgages work similarly to tracker mortgages, but with a crucial difference. Tracker mortgages usually follow the Bank of England's base interest rate, with an additional margin set by the lender. This results in them having some of the lowest interest rates available.
In comparison, discount variable mortgages follow the lender's SVR. This implies that while they are less expensive than SVR mortgages, they can vary unpredictably. Tracker mortgages, on the other hand, remain more stable and do not change as frequently.
Discount Vs Fixed Rate Mortgages
When considering mortgage options, a fixed-rate mortgage is an alternative to a discount mortgage. With a fixed-rate mortgage, the interest rate remains the same for the introductory period, typically two, three, or five years.
In contrast, a discount mortgage may have a variable rate that fluctuates during the same period, potentially resulting in a lower or higher rate than the fixed-rate mortgage. It's important to weigh the pros and cons of each option to determine which is best for your unique circumstances.
What Are The Advantages Of A Discounted Variable Mortgage?
There are several potential benefits to a discount variable mortgage, depending on the alternatives that are available to you:
- You will pay a lower interest rate than your lender's Standard Variable Rate (SVR) for the duration of your deal.
- If the Bank of England base rate changes and your lender lowers their SVR, it's possible that you may pay an even lower interest rate.
- Compared to fixed-rate deals, you are likely to have lower early repayment charges with a discount variable mortgage. This could be beneficial if you want to overpay each month and pay off the loan quicker, as it could help you pay less in fees.
What Are The Disadvantages Of A Discounted Variable Mortgage?
A discount variable mortgage has a significant drawback wherein your monthly payments are not fixed.
Even a small change in your interest rate could cause a considerable increase in regular outgoings. If you can handle this financial uncertainty, then an increase may not bother you too much. However, it may become challenging to budget effectively if your mortgage payments change frequently.
Additionally, most discount variable mortgage deals come with a 'collar' that prevents your interest rate from falling below a particular level. This collar limits the savings you can make on your mortgage.
What Are The Fees Related to A Discounted Variable Mortgage?
When arranging your mortgage, it's important to note that there may be some extra charges involved, but typically not as much as with fixed-rate deals. It's crucial to ensure that any fees you do pay won't make the deal less attractive overall before committing to it.
Your broker can inform you about possible fees such as arrangement, early redemption, and exit fees.
Can I Take Out A Discounted Mortgage When Remortgaging?
Yes, it is possible. If you are planning to remortgage, discounted variable-rate mortgages could prove to be a useful choice.
However, it is important to determine whether this is the right decision for you before proceeding with the remortgaging process.
Do your due diligence by assessing the costs, fees, and early repayment charges on your current deal to determine if remortgaging is a feasible solution.
How Can I Get A Good Discounted Rate Mortgage?
Your mortgage broker will search the market to help you find the most suitable discount mortgage deals.
They can provide valuable insights to help you weigh the pros and cons of various mortgage options. It's crucial to choose a mortgage that is sustainable over the long term.
Your broker may suggest that a discount variable mortgage is not the best fit for you currently due to the lack of certainty it offers. However, it could be an option to consider when you come to remortgage. You can refer to our remortgaging guide to learn more about the process.
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
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