Until recently, we may have never considered borrowing a mortgage on a Discounted Variable Rate. You may not know what this type of mortgage is, and you would be forgiven for not knowing. Take a look at our article which provides a full explanation of discounted variable mortgages.
A discounted variable rate can be really interesting. It can be really attractive. We at Advias are considering them for our clients, but we are looking at them in the context of where will that rate go. And by doing so, we are in a sense checking which is actually better, the discounted variable rate or the tracker mortgage.
At the start of 2022, we had uber low fixed rate money, and it was pretty easy to decide on a fixed rate mortgage as opposed to a variable rate mortgage with only upside on a variable rate.
However, the cost of fixed rate money has soared this year, and variable rate mortgages are currently much lower than fixed rates. Naturally they’ve caught a lot of attention.
Is a tracker mortgage a good idea now
It really depends because if you’ve got a Bank of England Base Rate Tracker Mortgage and it’s more expensive than the discount variable, you may be tempted to naturally lean towards the lowest rate.
However lenders that offer tracker rates typically move their rates that day. In terms of when you’re searching off sourcing systems, it will reflect the latest change in the Bank of England base rate. However building societies are slower to make their changes.
If there’s been a recent Bank of England base rate movement, what you’ve got to do is have a look at the discount variable in the context of this change; who the lender is, have they published a change in their standard variable rate on their website? How much they moved it by and did they change it in line with the Bank of England base rate?
The Factors you need to consider When looking at variable Mortgages
Quite often mortgage lenders will announce that they are changing their their standard variable rate a month or more after the Bank of England base rate increases. So it’s important to do some extra digging when you’re looking at discount variable rate mortgages.
The initial rate is not a true reflection of what the rate could be in about a month or two if there has been a recent increase in market rates.
Tracker mortgages explained in 2023
Here is a quick video where Edward establishes some thoughts that he had on the mortgage market specifically Tracker Mortgages and Variable Rate Mortgages going into 2023.
Very recently, we’ve seen that lenders are adjusting their standard variable rate in accordance with Bank of England base rate, but they’re doing it a month later. When you are looking at a best buy table or Moneysupermarket, speaking to your broker, you might see a great initial rate for a discounted variable mortgage that looks really attractive, especially when you compare against the Bank of England base rate tracker.
But, within the space of 30 days that lender is having a board meeting and they’re deciding to increase their standard variable rate. So what looked like very attractive rate will actually shoot up and be more expensive than the alternative tracker that was available.
So a discounted variable rate can be really interesting. It can be really attractive.
What is the difference between tracker and discounted variable mortgages
There are a few factors that you need to consider. So first of all, let’s just address what type of variable mortgages there are.
- Bank of England base rate tracker, which does what it says on the tin. It tracks the Bank of England base rate.
- Discount variable mortgage, which is essentially a discount on that particular lender’s standard variable rate. You may have a lender’s standard variable rate at 7% and they’ll offer a discount on that variable rate to give you your pay rate (Your interest rate)
- The lender’s standard variable rate which you’d usually default to as part of your normal mortgage arrangements.
- SONIA Tracker; the new market rate that replaced Libor and some mortgages track this rate as opposed to the Bank of England base rate.
So when you’re assessing your mortgage options, you are looking generally at what rate you’ve got to pay, the arrangement fees involved, perhaps other features like is there a valuation fee? Are the legal costs covered?
And that forms the basis of your assessment, doesn’t it? You’re looking at, I’m going to have a variable rate or a fixed rate…
However, variable mortgages, because they can be pegged to these different instruments, they need to be looked at, not as a variable mortgage, but as:
- a discount variable,
- a standard variable rate or
- a tracker mortgage,
Each has its own merits.
At what rate will the bank of england base rate peak
We know that Bank of England base rate is 3.5% (December 2022). We know approximately where the Bank of England thinks rates are going to go next year. They have eluded to a peak interest rate of 4.5% and then potentially dropping. However, with discount variable rates, it really is up to the lender in question, they may not follow the Bank of England movements.
Switch And Fix Mortgages
Other features to consider with variable rate mortgages are switch and fix. Many lenders offer this solution. Essentially, it allows for your mortgage product to go from a variable rate mortgage to a fixed rate during that initial term. And the lender will waive the early repayment charges to allow you to make that change.
That can be particularly useful if over the course of the initial rate, which could be two or three years, fixed rate money starts to fall. At that point it may be wise to lock in a fixed rate to gain security.
Highly attractive features of Variable Mortgages
Another highly attractive feature of variable mortgage can be that they have no early repayment charges. Not all lenders or products offer this feature, so it’s really important to have a look at the detail.
Having no early repayment charges means that you can have a lower rate initially, whilst keeping an eye on the mortgage market with the view to fix in at the later time.
You might be able to find out if your lender is due to change their standard variable rate by going onto their website. Usually, they have these announcements on the front page or on their products page.
Thank you for your attention.
If you would like any personalised mortgage advice, please feel free to contact the Advias team.