Discount mortgages look pretty cheap at the moment, particularly these new deals from Cumberland Building Society. But will they really save you money?
Cumberland Building Society has launched some enticing new discount mortgages with twogoing straight to the top of the best buy tables in their respective loan-to-value (LTV) bands.
The lender now has a market leading three-year discount mortgage at 2.69% on a 60% LTV mortgage or a competitive 2.79% on a 75% LTV. Both come with small fees of £495.
Elsewhere Cumberland has a table topping five-year discount on offer at 2.99% for those with a 40% deposit (or a 60% loan-to-value) that comes fee-free.
But what is a discount mortgage and could getting one help you save any money?
How discount mortgages work
A discount rate mortgage offers a reduction in a lender’s standard variable rate (SVR) for a specific period, giving you lower initial monthly repayments.
The important thing to remember is that it’s not the size of the discount that counts but the actual underlying rate you will have to pay each month.
You usually find deals last two, three or five years but sometimes can stretch to the term or ‘lifetime’ of the mortgage.
A discount mortgage differs to a tracker mortgage as it follows the rise and fall of a lender’s own internally-set SVR, rather than using the Bank of England's base rate directly.
As the lender’s SVR rate rises and falls so will your mortgage repayments. When the discount period ends you will revert onto the lender’s full SVR.
Generally these sorts of deals are attractive because they can be relatively cheap and have much smaller arrangement fees compared to tracker or fixed deals.
So what’s not to like?
The risks
The problem with discount mortgages is that for the sake of a decent rate and relatively low fees you are left completely at the mercy of a lender.
Banks and building societies can decide whether or not to follow suit and change their SVR when the Bank of England makes changes to the base rate, but lenders can also make changes without a cue. Your monthly payments are entirely dictated by what the lender chooses to do.
We have reported on quite a few shifts in some lenders’ SVRs over the past year. See Santander to hike SVR mortgage rate to 4.74% , Co-operative Bank hikes standard variable rate and RBS/NatWest and Halifax raise mortgage rates for more.
The base rate didn’t change at all in this period, as it has been at the record low of 0.5% for three and half years now, but lenders repeatedly blamed the increased cost of raising finance for the rises.
Using the Cumberland 2.69% three-year deal, borrowing £150,000 over 25 years would initially cost £687.37 a month. But should Cumberland decide to hike its SVR by 1% your monthly payments would shoot up by nearly £79.
Switching onto a better deal might seem like the answer if the tide turns, but it can be an expensive task. The Cumberland mortgages come with an early repayment charge of 2.5% of the amount repaid if you choose to repay all or part of your mortgage within three years.
Other lenders might charge a percentage of the mortgage advance which is the amount originally loaned to you.
So those that have room to manoeuvre on their finances might be suited to this type of dea,l whereas those that are sticking to a tight budget would probably do better looking elsewhere.
The best discount mortgages
If you’re happy to take a risk and enjoy some cheap initial repayments then here is a selection of the best discount mortgages available over a range of deals and LTVS. Each of these deals is the cheapest in their class.
|
Lender |
Deal |
Rate |
Discount |
Maximum |
Fees |
ERCs |
|
Two-year discount |
2.49% |
1.45% |
60% |
£999 |
2% in first year and 1% in second of sum repaid. |
|
|
Three-year discount |
2.69% |
1.80% |
60% |
£495 |
2.5% of sum repaid. |
|
|
Three-year discount |
2.75% |
2.00% |
75% |
£995 |
2% of sum repaid |
|
|
Two-year discount |
2.75% |
2.24% |
75% |
£995 |
2% of mortgage advance |
|
|
Five-year discount |
2.99% |
1.50% |
60% |
None |
3% of sum repaid |
|
|
Two-year discount |
2.99% |
2.00% |
80% |
£599 |
5% of mortgage advance |
|
|
Three-year discount |
3.15% |
1.84% |
80% |
£995 |
3% of mortgage advance |
|
|
Five-year discount |
3.19% |
1.60% |
80% |
£1,245 |
5% of sum repaid |
|
|
Five-year discount |
3.21% |
1.28% |
75% |
None |
3% of sum repaid |
|
|
Three-year discount |
3.25% |
2.00% |
70% |
£499 |
3% of sum repaid |
|
|
Five-year discount |
3.95% |
0.50% |
95% |
None |
1% of mortgage advance |
|
|
Three-year discount |
3.95% |
0.50% |
95% |
None |
1% of mortgage advance |
|
|
Three-year discount |
3.99% |
1.00% |
90% |
£499, |
5% of mortgage advance |
|
|
Two-year discount |
4.19% |
1.50% |
70% |
£499 |
3% in first year and 2% in second of sum repaid |
|
|
Two-year discount |
4.35% |
1.34% |
90% |
£999 |
3% in first year and 2% in second of sum repaid |
|
|
Two-year discount |
4.89% |
0.30% |
95% |
£250 |
2% of sum repaid |
Source: Moneyfacts
Can a discount mortgage save you money?
Personally I don’t think discount mortgages offer a very good deal for borrowers at the moment as tracker and fixed mortgages are offering much better rates.
[SPOTLIGHT]I was able to find a two-year tracker mortgage from ING Direct that costs 2.39% (1.89%+base rate) for two years on a 60% LTV which trumps the 2.49% best buy from HSBC in the discount range. However, ING charges over £900 more in fees at a whopping £1,945.
Even better is the Tesco two-year fixed rate of 1.99% on a 60% LTV, which comes in at 0.5% cheaper than the HSBC best buy. And in this case Tesco also comes in cheaper on the fee charging £995 compared to £999 from HSBC.
Elsewhere Chelsea Building Society has a two-year tracker at 2.54% (2.04% + base rate) on a 70% LTV, which completely blows the best deal in discount mortgages from Leeds out of the water. The Leeds discount mortgage costs 1.65% more! However, Leeds has a cheaper £499 fee whereas Chelsea asks for a hefty £1,645.
Even those with smaller deposits would be better off with a tracker or fixed rate deal.
Britannia has a 3.99% two-year fixed rate at 90% LTV, 0.36% cheaper than the comparable Leeds discount mortgage at 4.35%. Best of all it comes fee free while Leeds charges £999.
Even moving past the popular two-year deals reveals there are savings to be made elsewhere.
A five-year fixed rate mortgage on a 75% LTV with Yorkshire Building Society costs 3.04% with a £995 fee, whereas Cumberland Building Society offers a higher rate of 3.21% but comes with no fee.
Explore the whole market
Discount mortgages will suit some but maybe not all.
If you really want a better picture on what type of mortgage might suit your finances speak to a mortgage advisor that has access to the whole of the market.
Get in touch with one at lovemoney.com for free today.
At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.
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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
Your home or property may be repossessed if you do not keep up repayments on your mortgage
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Chelsea launches market-leading five-year fixed rate mortgage