FISCUS MORTGAGES - INFORMATION AND ADVICE

Discount Mortgage

A lender may offer a mortgage with an initial interest rate set at a fixed level below the mortgage provider’s standard variable rate (SVR). This SVR will change as it tracks the Bank of England’s base rate, but the discount will remain fixed for the length of the discount period. Once the discount period is over, the mortgage usually reverts to the lender’s SVR, a rate that is generally considered to be relatively uncompetitive.

This type of introductory offer is aimed at individuals that would wish to begin their mortgage with a lower monthly repayment. This may be due to the borrower being a first-time homebuyer, someone that needs to use some of their short-term income to purchase other items or possibly just someone expecting a wage rise over the next few years who would like to defer payments until their salary increases.

WHY DO BANKS OFFER DISCOUNT MORTGAGES?

Discount periods typically last 1-5 years, working under the simple rule that the greater the discount, the shorter the discount period. As with introductory 6-month, 0% balance transfer deals on credit cards, this is a loss-leader by the lenders. They are happy to lose money in the short-term, as they are confident that many individuals will continue with the mortgage after the discount period ends. At this point, the banks will realise a decent profit from the borrower.

An option that is therefore considered by most people as they approach the end of their discount period is to remortgage i.e. switch lenders and find another attractive offer. While it is true that this will benefit the consumer, there are two reasons for resistance to changing lenders:

1. The borrower will not attempt to remortgage.
This is basically what the banks are hoping for. Some people will not bother to shop around for a better deal, content with continuing with their existing mortgages. If this happens, the banks strategy has been successful, and they will profit from the consumer’s inertia.

2. The lender may charge substantial redemption penalties.
The lender may insist that once the discount period is over, that the borrower has to remain with the mortgage provider for a set period, paying the standard variable rate. This allows the bank to recoup the money they have initially “invested” in the customer in the hope that they will remain with them. Leaving before this period, the borrower may be faced with high redemption charges if they attempt to switch borrowers.

AS THE DISCOUNTED INTEREST RATE PERIOD ENDS…

Put simply, it is certainly worth shopping around as your discount period (or longer tie-in period) ends, to ensure you find the best suitable deal on the market. Several mortgage providers offer to pay all legal costs involved in remortgaging, and some even occasionally offer to pay the redemption costs of switching mortgages. However, a word of caution: when a lender offers to pay these costs, it usually translates into a higher interest rate or another extended tie-in period. This is the same loss-leading marketing idea that the discount mortgage is based upon.

It is therefore worth ensuring that you read the small print on any mortgage, to discover the extent of early redemption penalties and any other costs that will factor into your thinking, such as the legal fees involved.

Our discount mortgage tables allow you to easily compare interest rates and other features on the most competitive discount deals available from the vast majority of financial institutions in the UK.