Discount mortgage deals are currently topping the best buy tables. But are these rates really as good as they seem?
"Everything has its drawbacks... as the man said when his mother-in-law died, and they came down upon him for the funeral expenses."
When the author Jerome K. Jerome wrote these words in 1889, he probably never envisaged you would be here, in 21st century, applying them to `best buy' mortgage deals.
But that's exactly what you should be doing if you're about to take out a new mortgage. Especially if you're thinking of going for a variable rate.
Trackers vs. discounts
Don't get me wrong: with the Bank of England predicted to cut interest rates shortly, variable rate mortgage deals look a good option for many borrowers.
This is because, unlike a fixed rate, variable rate mortgages vary with interest rates. So when the Bank cuts interest rates, your monthly payments should get smaller.
The trouble is, not all variable rate mortgages work in the same way - and choosing the wrong type of deal right now could leave you in deep water, watching your finances drift away from you downstream.
Your two main options are:
A tracker, which is guaranteed to rise and fall when the Bank of England increases and decreases its Base Rate.
A discount rate, which usually offers a juicy 2% discount off the lender's Standard Variable Rate (SVR).
So which one is better?
To answer this question, let's take a look at some of the best trackers and discount deals available at the moment.
Best discount rate mortgages
Lender | Rate | Term (yrs) | Fee | Max LTV | ERC | Notes |
|---|---|---|---|---|---|---|
Discounts | ||||||
Hanley Economic | 5.35% | 2 | £799 | 90% | Yes | Free valuation. Free legal work for remortgages |
Darlington | 5.47% | 2 | £674 | 90% | Yes | |
Mansfield | 5.54% | 2 | £350 | 75% | No | Refunded valuation |
Principality | 5.64% | 3 | £1,349 | 75% | Yes | |
Leek United | 5.79% | 10 | £495 | 90% | No | Free valuation & £250 cashback |
Source: The Motley Fool Mortgage Service
Best tracker mortgages
Lender | Rate | Term (yrs) | Fee | Max LTV | ERC | Notes |
|---|---|---|---|---|---|---|
Trackers | ||||||
Co-Op | 5.49% | 2 | £999 | 95% | Yes | Free valuation & legal work for remortgages |
Scottish Widows | 5.50% | 2 | £2,499 | 75% | Yes | Offset. Refunded valuation. Free legal work for remortgages |
Britannia | 5.70% | 2 | £499 | 90% | No | |
Saffron | 5.44% | 3 | £699 | 85% | Yes | Refunded valuation |
Chesham | 5.85% | Life | £749 | 90% | No |
Source: The Motley Fool Mortgage Service
Looking at these tables, you could easily conclude your best option would be to go for a discount rate. This is because, without speaking to a professional mortgage broker, you would assume that the deal with the lowest rate is the cheapest, and therefore the one you should go for.
Mortgage men are not mad
Following last year's sub-prime debacle, you could be forgiven for believing the men who run mortgage companies are complete idiots. But when it comes to pricing their products, they're often pretty canny. If they're pricing discount mortgage deals cheaper than trackers, they have a reason. And it's all about control.
Put simply, with a discount variable rate, the mortgage lender is in control. If the Bank of England changes the Base Rate, the lender can decide whether or not to follow suit and change its SVR. And as your cheap discount rate is linked to the SVR, your monthly payments will go up and down according to what the lender wishes to do.
Now, you can bet your bottom dollar that when the Base Rate jumps up half or quarter of a percent, most lenders increase their SVR quicker than a Cambridge don can say: "Pass the port." When it's the other way around, however, and the Bank of England cuts interest rates, well... it's a different story.
At the beginning of this month, five weeks after December's Base Rate cut, Moneyfacts.co.uk reported that 10 major lenders had still hadn't bothered to pass on any reduction in interest rates to their variable rate borrowers.
Let's name and shame these stingy lenders:
- Bath Building Society
- Ecology Building Society
- Harpenden Building Society
- Intelligent Finance
- Ipswich Building Society
- Manchester Building Society
- Marsden Building society
- Monmouthshire Building Society
- Principality Building Society
- Skipton Building Society
A further 18 failed to pass on the full benefit of the 0.25% cut that the Bank of England made:
Lenders who have passed on less | Rate cut |
|---|---|
Alliance & Leicester | -0.2% |
Cheshire BS | -0.2% |
Earl Shilton BS | -0.2% |
Mansfield BS | -0.2% |
Northern Bank (NI) | -0.2% |
Nottingham BS | -0.2% |
Scottish Widows Bank | -0.2% |
Ulster Bank (NI) | -0.2% |
Saffron BS | -0.19% |
Catholic BS | -0.17% |
Allied Irish Bank (GB) | -0.15% |
Egg | -0.15% |
First Trust Bank (NI) | -0.15% |
Loughborough BS | -0.15% |
Northern Rock | -0.15% |
Scottish BS | -0.15% |
Beverley BS | -0.14% |
Dunfermline BS | -0.1% |
With a tracker, you are protected from these tight-fisted mortgage lenders - which is particularly important now, when many are under pressure to cut corners due to the credit crunch.
Remember, the movement of a tracker is transparent: it will fall when the Base Rate falls, so your monthly payments are guaranteed to decrease by the full Base Rate.
Having said that, there are some lenders out there who make a point of treating their customers fairly, even those on discount rates. Halifax and Nationwide, for example, decided to lower their SVRs by the full 0.25% within an hour of the Bank's announcement that the Base Rate would fall last December.
So if you had opted for a discount variable rate with one of these lenders, you would have been no worse off than if you had opted for a tracker. But if you had gone with a lender in the lists above, you might be regretting it right now.
Of course, despite predictions that interest rates will be cut, a variable rate - of any sort - may not be the most suitable deal for you. As my Foolish friend Jane Baker explained in How To Cut The Costs Of Your Mortgage, borrowers who need the security that comes with fixed monthly payments would be much better off with a fixed rate.
That's why, in my view, before you jump into bed with the best of the best buy tables, it's always worth checking with a whole-of-market broker that it is really the best deal you can get. (The Motley Fool Mortgage Service is one such whole-of-market broker.)
But however you decide to choose your mortgage - and no matter how much you adore your mother-in-law - do keep Jerome's wise words in mind, and watch out for nasty drawbacks that can catch you out.
More: How I Picked My Mortgage
> Use the Motley Fool Mortgage Service to speak to a whole-of-market broker.