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What are mortgage rate discounts and deals?

Mortgage rate discounts and deals give you a cheaper interest rate than the lender’s Standard Variable Rate (SVR) for a period of around two to five years.

Mortgage discounts typically refer to those on a variable rate of interest, meaning they can still rise during the offer period if the lender’s SVR rises too.

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A variable rate mortgage discount is simply a discount on the standard variable rate. If the SVR is 5% and the mortgage discount is 2% then your standard variable rate will be 3% for the length of that offer period. However, there are other types of deals and discounts that appluy to other kinds of mortgage rates.

Mortgage discounts explained

Just as the term suggests, a mortgage discount is a discount on the amount of interest you pay on your mortgage. These offers are typically either two years or five years long, but some might be shorter, longer or somewhere in between.

Mortgage discounted periods can apply to:

  • Fixed rates. A fixed rate mortgage deal gives you a discount on the current standard variable rate, but keeps the discount the same irrespective of any changes. So if the SVR rises, your discount remains the same. On the downside, even if the SVR goes lower, meaning you would normally pay less, your fixed rate discount would stay the same.
  • Variable rates. Variable rate discounts are typically known simply as mortgage discounts. These are discounts on the lender’s current standard variable rate, and remain discounted by a certain number of percentage points. So that means if the SVR rises, your discount rises too, and the same applies if the SVR lowers.
  • Tracker rates. Tracker mortgages follow the trajectory of the Bank of England’s interest rates. They are very similar to standard variable rate deals, but they more closely follow the bank rate. Tracker mortgages are best when rates are low and look set to stay low for a while.

When these deals end, your mortgage will revert to the lender’s standard variable rate. When comparing mortgages it is best to not only compare the discounted interest rates, but also the standard variable rates, because this is ultimately what you will be paying for a far longer period of time.

Are longer discounts and deals better?

The difference between the shorter deals and the longer deals, i.e. two years or five years, comes down to flexibility versus security, and how you think the bank rate might change.

The shorter mortgage deals can often be much cheaper than the longer deals, as you will move on to the lender’s standard variable rate much sooner. The longer deals may not offer the best discounts, but you will have a little more peace of mind about how much you will be paying over the next five years.

Flexibility should also be a deciding factor when comparing different discount lengths. You may want to be flexible with your mortgage and thus take out a shorter deal, so that you can remortgage to a better rate. You may also consider a shorter mortgage deal simply because you believe the bank rate is going to be go down, and locking yourself into a discounted deal for too long will mean you miss out.

On the other hand, if bank rates look set to rise, then the security of a longer deal will obviously be more appealing.

What are early repayment fees?

Another reason why you might want to consider a longer mortgage discount is to make overpayments for longer, and therefore potentially save thousands of pounds in interest.

However, there making mortgage overpayments could result in early repayment fees. Most mortgage providers give you the option to make mortgage overpayments by up to 10% of the mortgage value, but each lender will have their own rules around this.

Early repayment fees are penalties for going over the mortgage overpayment threshold, and are usually somewhere between 3% and 5% of the amount you overpaid by.

How much will my mortgage go up when my discount ends?

This all depends on how much your discount was and how much the lender’s standard variable rate changes over the course of the introductory offer period.

The standard variable rate is subject to rise or fall depending on the mortgage market and, more importantly, the Bank of England’s interest rate decisions.

Irrespective of this, you will still likely pay more than what you were paying on your discount rate once that deal ends.

Aim to have some emergency cash available in case rates dramatically rise and your mortgage repayments increase, but also, keep an eye on mortgage market and compare remortgage deals so you can quickly switch when your deal ends.

When should I remortgage to a new discounted rate?

Start comparing remortgage deals just before your discounted mortgage rate is about to end. Remortgaging will allow you to switch to a new mortgage provider, who will also offer you an introductory discounted rate, so you can continue to avoid paying your mortgage at the standard variable rate.

Remortgaging means paying off your mortgage early so there is almost always a early repayment fee, but this will be far higher if you do it while you’re still in your discounted offer period.

Make sure the new deal, in spite of the early repayment fees and other mortgage set up fees, still works out to be cheaper in the long term.

Mortgage deals explained

Some mortgages also offer extra deals alongside discounted interest rates. These include discounts and refunds on the various fees associated with the mortgage application and home buying process, such as legal and set up fees, and occasionally stamp duty.

There are also cashback mortgages, which give you cash upfront once the application has been finalised.

Many of these deals come at the cost of a less impressive discount on the interest rate, so you will need to weigh up what is more important to you: short term or long term savings.

However, some mortgage deals on cashback and fee discounts, can still work out cheaper. The most important thing to do is to keep comparing the market for the best interest rates as that is what is ultimately going to decide how much money you pay on your mortgage.

Should I stay on the standard variable rate?

The standard variable rate is the default rate for your mortgage, but you should be looking to move to a better deal where possible.

Mortgage discounts are almost always better value than the lender’s standard variable rate, and nearly all mortgages offer one. Compare remortgage deals regularly, especially as you get closer to the end of your current discount period.

Comparing mortgage rates

Ultimately, when it comes to comparing mortgages, the interest rates are by far the most important aspect. The deals, discounts and cashback are short term gains, but a mortgage is 20 or 25 years or sometimes even longer.

Interest on mortgages is compounded, which means that the longer you take to pay it back, the more interest you end up paying in the end.

If your mortgage rate is low, then you can afford to overpay and make bigger savings on your mortgage in the long run.

You also want to make sure there is a degree of flexibility and security in the mortgage you choose. You want to be able to make overpayments without getting a penalty, and you want to be able to remortgage without incurring too many fees, but you also want to be assured that you can continue to make repayments even if rates rise or your situation changes.

 

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