Discounted Mortgages VS Fixed Rate Mortgages | Are They Cheaper?

Let’s Talk Money and Mortgages

Introduction

Gemma: Hello and welcome back to our channel and podcast! My name’s Gemma, and here at WIS, we talk about money, mortgages, and positive money mindset.

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On today’s episode of Let’s Talk Money and Mortgages, we are joined by Ifthi.

For those who don’t know, Ifthi is a trained accountant and mortgage advisor with over 11 years of experience in the industry. He is also one of the founding directors here at WIS.

Welcome back, Ifthi! How are you today?

Ifthi: Hi, I’m very well, thank you.

Gemma: I’m good, thank you!

Q1: What is a discounted rate mortgage?

Ifthi: A discounted rate mortgage is a discount on the bank’s standard variable rate (SVR).

Standard Variable Rate (SVR): This is the rate banks lend at if you don’t have a specific mortgage deal.

Discounted Rate Mortgage: The bank applies a discount to their SVR.

Example:

Bank’s SVR = 5%

Discount = 3%

Discounted rate = 2%

It’s similar to a tracker product because the rate can go up or down if the SVR changes.

Q2: What is a tracker mortgage and how does it differ from a discounted rate mortgage?

Ifthi: Both trackers and discounted rates are variable rate products, meaning they can change over time.

Tracker mortgages:

• Linked to the Bank of England base rate.
• Example: If base rate rises from 1% to 1.5%, your rate increases by 0.5%.

Discounted rate mortgages:

• Linked to the bank’s SVR, not the base rate.
• Bank can change the SVR independently, so the rate can change without base rate adjustments.

Key difference:

Trackers = connected to base rate

Discounts = connected to bank’s internal lending rate

Q3: Do discounted mortgages have early repayment charges?

Ifthi:

SVR usually has no early repayment charges, meaning you can leave without penalty.

Trackers: Often similar to SVR, but some deals may have charges.

Discounted mortgages: Most have early repayment charges.

Example:

Fixed rate mortgage = 2.5%

Discounted mortgage = 1.5%

Early repayment charges apply if you want to exit early.

Takeaway:

Discounted mortgages can be cheaper, but you pay a penalty to exit early.

Q4: Are discounted mortgages cheaper?

Ifthi:

On the surface, yes — the rates are often lower than fixed rates.

Example: On a £500,000 mortgage:

2.5% fixed = £12,500/year

1.5% discounted = £7,500/year

Difference = £5,000/year

Risk: If rates rise, discounted mortgages may become more expensive than fixed rates.

Advice:

Depends on personal circumstances and risk appetite.

Q5: What should people consider before choosing a discounted mortgage?

Ifthi:

Assess your personal circumstances — discounted rates may not suit everyone.

Trackers can be advantageous because:

• Often no early repayment charges
• Can exit without penalty

Discounted rate mortgages are dependent on bank SVR, so you have less control.

Consider your risk appetite and loan size.

Important:

Higher loan amounts = higher financial risk.

Always perform a mortgage assessment before choosing.

Q6: Can banks change discounted rates arbitrarily?

Ifthi:

Banks can change their SVR at any time; no formal restriction exists.

In practice, banks are mindful because drastic changes are unpopular.

SVR is loosely correlated with the Bank of England base rate, but it’s not directly linked.

Q7: Is it worth taking a discounted rate mortgage?

Ifthi:

Depends on your risk tolerance and loan size.

If the loan is small and you can tolerate risk, it may be a good option.

Example: If the discounted rate is 1% lower than fixed, you could save money unless rates rise significantly.

Advice:

Speak to an advisor to understand if it suits your situation.

Q8: Are discounted mortgages widely available?

Ifthi:

Mainstream banks and high street banks often don’t offer them.

Popular among smaller building societies or banks.

Advisors are useful because they understand the products and provider rules.

Important:

Building societies have specific membership rules.

Advisors can guide you through these nuances.

Conclusion

Gemma:

Please check with an advisor to ensure these points are applicable to you.

A reminder:

⚠️ A mortgage is secured against your home or property and may be repossessed if you do not keep up with repayments.

Thank you for joining us today! We’ll be back next week with another episode of Let’s Talk Money and Mortgages.

Have a great day, stay safe, and we’ll see you again soon!