Discount Mortgage vs Tracker Mortgage
These two mortgages share some similarities which can be a bit confusing when you’re trying to decide which kind of deal to take. They both, for example, work on a variable basis – this means that your repayments can go up and down depending on the interest rate that they follow. A discount mortgage gives you a percentage off a lender’s SVR (Standard Variable Rate); a tracker follows the Bank of England base rate at a set level. Let’s look at what you get:
These loans work on a simple ‘money off’ basis. So, if your lender’s SVR is 4.99% and you are given a 2% discount, you’ll get a rate of 2.99% for the duration of your deal. If the lender changes their rate, then your discounted percentage will stay the same, but your costs will increase or decrease. So, for example, if the rate rises to 5.5%, you’ll be working on 3.5%; if it goes down to 4%, you’ll be working on 2%. Like any variable deal, this can work well for you if rates remain low or dip but will cost you more if they start moving upwards.
The main disadvantage here is the fact that your loan will be tied to the lender’s rate. The Bank of England creates the base measure used by the sector, but a lender doesn’t have to follow it when it changes. Most are quick to put their SVRs up when it rises but maybe not so quick to put them down when it drops. So, you have no guarantees that a discounted deal will always work in your favour which could, over time, make the deal you get look less attractive.
Again, you’ll benefit here if rates are low and pay more if they increase. These products track the Bank of England rate and are usually set at a percentage above. So, for example, if your deal is set at 2.5%, you’ll pay this on top of the BoE measure. At the moment, this is set at 0.5% so your tracker would work out at 3%. This percentage also stays the same for the time your deal lasts but you aren’t at the mercy of a lender. If the BoE makes a change, you’ll see it too.
It’s also worth noting that both these types of mortgage can come with a collar. You need to know if this applies before you choose a deal. A collar can take away some of the advantages of variable rates (but is often unavoidable now) as it basically sets a lower limit to protect lenders. If rates hit this point, your repayment will fix until they move up again.
The difference between depending on an SVR and on the Bank of England probably makes more people opt for a tracker right now. But, both deals can work well – you just need to look at what’s on offer and how much you’ll be paying (both to start with and in different scenarios).
If you are worried about interest rates rising in the future and driving your costs up (though this doesn’t look likely right now), you can buy into the security of a fixed rate or a variable with cap. Caps work the opposite way to collars to prevent steep rate increases affecting your pocket.
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