For first time buyers a discount mortgage could save them money rather than fixed rate where the interest charged is more expensive.
Research from Moneyfacts shows first time buyers usually select a fixed term mortgage charging 0.82% more interest than a comparable discount mortgage rate.
First time buyers choose fixed rates to give them the peace of mind that their monthly payments will remain the same, even if interest rates increase.
Yet the higher cost they pay for a fixed rate mortgage means this may not be the most cost-effective option and they could be significantly better off with a discounted rate deal.
Even home movers, remortgage buyers and buy-to-let landlords can benefit by considering the cost difference between these options.
Higher cost for fixed rate mortgage
Fixed rate mortgages are more expensive for a 95% loan to value (LTV) it is 0.82% higher than the current average discounted variable rate.
For mortgages with lower deposits typical with first time buyers the rates are up and the gap between fixed and discounted mortgages has doubled in the last six month.
Moneyfacts Has compared the change in rates for a 95% LTV, two-year fixed and discounted rate mortgages in the following table:
| Time period | Fixed rate | Discounted rate | Difference |
|---|---|---|---|
| One year ago | 4.03% | 3.41% | 0.62% |
| 6 months ago | 3.92% | 3.51% | 0.41% |
| Today | 4.16% | 3.34% | 0.82% |
Charlotte Nelson, finance expert at moneyfacts said, first time buyers tend to stick to fixed rate mortgages because they are simple to understand and a great way to manage their money.
The difference in the fixed and discount rates has increased from 0.41% 6 months ago to 0.82% today, exactly double the cost.
For remortgage buyers at the end of your mortgage deal, avoid the lenders expensive variable rate and switch to a preferential rate to reduce your monthly repayment costs.
There are many options available to first time buyers in addition to fixed rates as the 95% LTV mortgages which are on the rise and are more expensive.
For older equity release mortgage buyers, fixed rates can typically be secure from interest rates of 5.3% upwards without any evidence of earnings which is important for borrowers with only pension income.
The pricing of fixed mortgage rates depends mainly on whether banks can access cheap money to lend out from savers or by borrowing on the money markets at a certain “swap” rate for a time period.
These swap rates react to expectations of future interest rates and inflation, which affect the price of mortgages.
Save a thousand per year with discount rates
The cost of the average two-year fixed rate mortgage at 95% LTV is well above last year’s figure whereas the discounted variable rate is falling.
A lower cost offered by the discounted rate of 0.82% offers first time buyers the opportunity to minimise their monthly repayments.
For the average two-year 95% LTV based on a £200,000 mortgage over a 25-year term on a repayment-only basis the discounted rate would save £89.25 a month or £1,071 a year compared to the fixed rate, said Ms Nelson.
Discounted variable rates offer a discount on the lender’s Standard Variable Rate (SVR) and there’s the risk rates will rise with the Bank of England base rates.
Fixed rates on the other hand will remain the same for the term you select even if base rates rise during the course of the mortgage term.
Therefore you need to balance the benefit of lower rates now compared to the potential for them to rise in the future but you can still be better off even if rates rise by 0.5%.
This also applies to home movers, remortgage buyers and buy-to-let landlords that can benefit from the lower cost of discount rates to fixed rates although the gap may reduce of you have a larger deposit.
What are your next steps?
Call our LCM mortgage brokers if you are a buy-to-let landlord with a property, remortgaging and want the best mortgage deal, buying your first home or you are planning to move home.
Learn more by using the mortgage monthly cost calculators, property value tracker chart and equity release calculator. Start with a free mortgage quote or call us and we can take your details.
For equity release buyers our London City Mortgage advisers can recommend lifetime mortgages allowing you to receive cash from your home to maintain your lifestyle, holidays or buy a more expensive home.
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