Six mortgage deals to avoid

Opting for a discount variable mortgage is a bad idea in the current climate...

Discount mortgages are currently sitting at the crest of a wave of bargain home loans. Rates on this type of mortgage are now as low as 1.99% for borrowers with a big deposit.

However, these deals will almost certainly be the first to come crashing back to reality when this wave of low mortgage rates eventually hits solid land.

Crest of a wave

The interest rate on a discount mortgage is obtained by applying a discount to the lender’s standard variable rate, or SVR. The lender can shift this SVR at any point, meaning that your discounted rate can also move at the will of the lender.

Take a look at the table below for six of the best discount mortgages around at the moment:

Temptingly low rates, I know. But don’t be sucked in by their charm. It’s all superficial.

Unstable rates

As I noted earlier, control over discount mortgage rates is completely in the hands of the lender. Not even the Bank of England Base Rate really plays a role. The whole deal price is based on an SVR; a rate created wholly by the provider.

So if a lender wants to up your rate, they can. Just like that. This makes it very hard to budget mortgage repayments.

Effectively, you’re wandering into a darkened room with a candle that could go out at any moment. What if the lender doubles your interest rate? Could you still afford the repayments then?

Put simply, discount mortgages have a huge potential to go very, very wrong. Especially in the current climate.

Tremors

Slipping through the trade press last week was the news that Lloyds Banking Group had upped the SVR for Bank of Scotland and The Mortgage Business customers. 175,000 people will face higher bills when the change from 4.84% to 4.95% change comes into force.

Now this may not sound like a big change. And, really, it’s not: the 175,000 affected customers will only see their repayments jump by around £10 per month. But the move by Lloyds does represent something of a tremor preceding what could be a full quake of SVR rises.

Full quake

As I reported in These cheap mortgages won’t be around for long, we could be set for a raft of mortgage rate rises in the not too distant future.

Earlier this month, the Bank of England’s Trends in Lending report stated that lenders were finding it more expensive to finance mortgages on the international money markets.

This could lead lenders to increase their SVRs to fill their funding gaps.

So if you’re on a discount mortgage, you will instantly see your rate balloon. And it doesn’t get any better when the fixed term of your deal runs out.

Leave you in the lurch

Cast an eye back to the revert-to rates built into the discount deals detailed in the table above. This is the interest rate you’ll be shunted onto when the initial period runs out.

HSBC and ING both revert to a relatively reasonable 3.94% and 3.5% respectively. But remember, that’s before any future SVR rises. Factor in a rise of a couple of percentage points and, at the very minimum, you’re easily looking at a 6% or 7% rate.

The final four mortgages in the table above from Leeds, Market Harborough and Mansfield Building Societies look scary enough as they are: two 5.69% SVRs, one 5.49% and one 5.59%. And that’s before any future rate rises.

What’s worse – as we reported in A two-year mortgage will break your heart – the length of two and three year discount deals could hurt you even more when you consider the timing of any future Base Rate rise.

It’s a fair bet that in two or three years, the Base Rate will be higher than the current 0.5%. The knock-on effect of this is that the mortgage market you’ll be shunted into when your initial discount period comes to an end will be far pricier than it is now.

To summarise; you could easily end up with an extortionate SVR rate in the region of 7%, attempting to remortgage in a market with very few competitive deals around.

Those initial rates aren’t looking so attractive now, are they?

Ten tough deals

So finally, here are ten tougher mortgages that will allow you to deal with looming rate rises in far more wallet-friendly way. But again, be careful if you’re leaning towards the cheap two and three year deals – as the rate may leave just as you need it the most.

Do you agree?

Are discount mortgages a waste of time?

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