Considering a Discounted Variable rate

Mar 4, 2022

You’re probably reading lots in the media about rate rises. Well. At least you probably were before this awful war broke out in Ukraine.

Generally speaking, whilst rates are indeed on the rise. Something rather peculiar is happening. We are noticing fixed rates increasing at a greater rate than their variable counterparts. At the time of publishing this article, there is currently a ‘Discounted Variable’ rate of 0.79% with Furness Building Society whereas the cheapest fixed rate is 1.59% with Lloyds Bank. The mathematicians amongst you will have deduced that’s less then half the interest!

So, what is a Discounted Variable rate mortgage and why are they so cheap? The clue is in the title, these rates are variable, which means they could increase or decrease throughout their initial beneficiary period. In the above example, the Furness product has a 2 year beneficiary period meaning that after two years you will revert to the lenders’ Standard Variable Rate. (SVR) You are then released from any monetary tie-ins meaning your can remortgage and not pay a penalty to leave. Exactly the same as what you would do at the end of a fixed rate!

The ‘Discounted’ element refers to the amount you are getting off of the lender’s SVR. For example, if the lenders’ SVR is 6% and the discount is 4%, you will initially pay 2%. If the lender decides to increase it’s SVR then your rate will increase in line with this, albeit retaining a 4% discount.

It’s therefore inherently riskier than a fixed rate as you have no certainty of the interest rate that you will actually pay from the get-go. Because you’re taking on more risk, you are rewarded with a lower initial rate, it’s as simple as that.

These rates are typically offered by building societies who themselves have higher SVR’s than the big banks. The SVR’s are not linked directly to the Bank of England Base Rate so they must not be confused with trackers which typically track the base rate precisely. This means your lender can change their SVR (and potentially therefore your rate!) based on their own volition. These changes to rates are not necessarily impacted by the wider financial markets, in fact, building societies typically lend their member’s money rather than borrowed money meaning they are less impacted by global markets than banks.

If a building society wants to lend money, they will typically offer lower rates to attract new business. If they want to bring back money previously leant they will increase rates to encourage people to pay mortgages off. These examples are entirely up to the building society in these examples.

Steven Morris – Advising Director

CeMAP CeRER

 

Steve loves a complex mortgage. Most recently he has used his technical geekery to work his way up through Which? Mortgage Advisers, progressing to Senior Adviser and then Onboarding Manager. There, he was responsible for hiring, training and managing new advisers.

He also ran the monthly new starter inductions and wrote and maintained the telephony advice standards of the company. Outside of work Steve can be found coaching and being run ragged by his local under 10’s rugby team, Bristol Harlequins RFC.

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