Discount Offset Mortgage | Beyond The Discounting Of Deals

Beyond The Discount On Discount Offset Mortgage Deals

It's easy to see the appeal of a discount offset mortgage. A discount offset mortgage is one that offers a discount off the lender's standard variable rate. The discount offered can be anywhere from around the half a percent mark to a couple of percentage points. It is best not to confuse a discount offset mortgage with a tracker offset mortgage. A tracker offset mortgage usually tracks the Bank of England base rate. Sometimes this can be below the base rate, but usually it's above.

In contrast, the discount on a discount offset mortgage relates to a lender's standard variable rate. This is a rate set by the lender which may have a relationship with the base rate. This means that interest rates on the offset mortgage will rise when the base rate rises. However, some offset mortgage lenders are slow to pass on reductions in the base rate so your offset mortgage could cost more than other people are paying once you're out of the discount period.

How The Discount Works

A discount offset mortgage will usually have a discount off the offset mortgage lender's standard variable rates for periods of six months to several years. In general, the shortest discount periods will enjoy the most discount. So, for example, a five year deal might have a discount of 0.5 per cent on the standard variable rate, while a six month offset mortgage might discount the standard variable rate by as much as 2 per cent.

A discount offset mortgage is likely to appeal to people who don't want to be tied into a fixed rate deal. Discounts may also be suitable for those looking for a low initial payment, such as first time buyers. However, not every discount offset mortgage is what it seems and a low initial rate offset mortgage deal could end up costing home buyers more than they expected to save on the discount offset mortgage package.

Fees For Discount Mortgages

Many discount offset mortgage lenders charge borrowers high fees for the privilege of having the discounted rate. Arrangement fees for some discount offset mortgage deals can be well over £1,000. This suddenly makes the discount offset mortgage less appealing. It's also worth looking out for any penalties for leaving the deal early, as these can be quite steep. With any offset mortgage deal, borrowers should look out for exit fees, administration fees and early repayment fees. Offset mortgage lenders charge early repayment fees in a range of ways. Some of them charge mortgage interest for a set period and others insist that any incentives be repaid. Still other discount offset mortgage providers charge a percentage of the total loan or the amount repaid on a sliding scale relating the amount of the discount period that still remains.

All of these issues may mean that a discount offset mortgage may not be quite as good value as it looks at first sight. If you're short of cash and need low repayments for a fixed period, a discount offset mortgage may be a good option. However, it's also worth considering a fixed rate offset mortgage as an alternative to the discount offset mortgage deals.

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