In a world where every penny counts, when you put the words discount and mortgages together people instantly sit up and ask what is a discount mortgage and how can I get one?! But are they the best option for you? We explain.
Unfortunately the discount you get on a discounted mortgage is not permanent. Rather it means you to pay an interest rate that is a certain percentage below the discount mortgages provider’s standard variable rate (SVR) for a pre-agreed time.
Obviously when you're looking to compare discount mortgage deals the first question you need to ask is how long does the discount on the mortgage deal last.
The answer will vary both between lenders and between mortgage deals, but will typically be somewhere between one and five years. This will usually represent the duration of the mortgage deal and you will generally be tied in to the mortgage for the entire discounted period and charged if you decide to transfer your mortgage elsewhere during this time.
Once the initial deal ends the interest rate applied to your mortgage will revert to the current standard variable rate of your mortgage provider. This is likely to result in a significant increase in the amount you are paying each month.
It's vital that you also realise that while the discount on your provider's SVR will remain fixed throughout the term of your mortgage deal, your repayments aren't.
If your mortgage provider's SVR increases during the term, the rate of interest applied to your mortgage, and therefore your repayments, will also rise by the same amount.
When you're comparing the affordability of discounted mortgage deals you should look at whether you could still meet your mortgage repayments after a significant increase in your provider's SVR.
If you'd struggle to do so then looking at a fixed term option may be better as it would give you more financial security throughout the initial mortgage term as your repayments would be set at a predetermined amount.
This 'tracker' quality of discounted rate mortgages also means that if your mortgage provider's SVR falls, your repayments will also mirror this change. Most discount mortgage deals will specify a 'floor' below which your interest rate cannot fall to ensure that your custom is profitable no matter what happens to interest rates. Make sure you look for this and that it's set at a level that allows you to benefit from reductions in interest rate.
However, when comparing discounted mortgage rates it is important to consider all aspects of the mortgage, not just the amount you will be paying per month.
For example, many discount mortgage lenders tie applicants into very strict terms that will require you to pay substantial fees and charges should you wish to pay off some or all of your mortgage early.
These fees do differ between lenders so compare them in the same way that you would compare your standard discount mortgage rates.
You should also take into consideration the other fees that are levied when you apply for each mortgage deal as these will impact the overall affordability of the options you're considering.
If you decide that a discounted mortgage is right for you it's then simply a case of applying for the discount mortgage deal that both meets your requirements, suits your circumstances and gives you the cheapest mortgage possible.