In such a time of increased market volatility, the importance of financial advice comes into its own and for borrowers looking to take out a mortgage, the role of brokers in ensuring they understand every option available to them has never been more critical.
During such turbulent times every penny counts and many borrowers, such as those involved in standard residential property purchases, may seek the security and stability of a fixed rate mortgage as they offer a guaranteed monthly repayment amount and a stable interest rate at a time when uncertainty prevails. In this situation, a fixed rate mortgage can provide greater financial certainty for those who want it most.
However, a growing number of clients have circumstances which are far from standard. Whether due to having greater liquidity and more cash assets at their disposal, or because they need more flexibility when it comes to their borrowing needs.
In situations such as these, a discount mortgage could prove to be a more viable solution. Discount mortgages work by offering a reduced rate over a certain period of time, typically one or two years.
Discount mortgages offer flexibility and pricing is attractive
The rate is tied to the lender’s standard variable rate (SVR) and not the Bank of England base rate, so any movement is governed by the mortgage lender, which means the rate can go up or down at the lender’s choosing and not in line with the base rate.
While this may be unappealing for some borrowers, for those looking for more flexibility, in a position to overpay the loan, or continue to meet their repayments with no financial difficulty should they fluctuate, a discount mortgage could help them to save money by lowering the overall amount of interest payable on the loan.
This could be an attractive proposition given the fact that the average two-year fix is now priced at six per cent or over according to Moneyfacts. So, for those clients with a bit more liquidity and the ability to absorb the cost, taking out a one-year discount mortgage at a rate of 3.80 per cent for example, could prove beneficial and help them save more money in the long term.
Similarly, some borrowers may know they are likely to come into a substantial sum of money in the near future, perhaps through inheritance, and could take out a discount mortgage and use the lump sum to pay off the mortgage further down the line.
Those with higher disposable incomes may also be able to better manage any payment fluctuations.
Understanding lender’s historical SVR is crucial
Understanding the historical rate of any lender’s SVR is crucial in deciding whether a discount mortgage is the right solution for your client and advisers should always ensure they do some research on how it has tracked over the last year.
For example, data compiled by Loughborough Building Society on a selected 23 building societies shows that the rise in SVR’s has varied between 0.40 per cent and 1.65 per cent between December 2021 and October 2022.
In comparison, the Bank of England has raised interest rates seven times since December 2021, from 0.1 per cent to 2.25 per cent in September, with further increases expected by the end of the year.
Obviously, discounted mortgages will not represent the best fit for every lending scenario but it is important to remember that the needs and circumstances of every client are different.
It may be that your client thinks a fixed rate mortgage is their only option, but after weighing up the pros and cons, may well benefit from the flexibility of a discounted mortgage instead.
Good advice is about exploring every angle and presenting the information to clients in a clear, concise manner to ensure that an informed decision can be made. In the current climate, borrowers need the specialist skills of mortgage brokers more than ever, therefore exploring all options remains essential.
