Fixing a mortgage and locking in a rate for a set period of time is a mantra that has been ingrained in the psyche of borrowers for such a long time that, for many, exploring other options may not have even crossed their mind.
For brokers too, operating in the low interest rate environment for the last 14 years means that fixed rate mortgages have largely become the default option when giving advice as, in the majority of cases, it was often the best and most suitable option for their client.
However, if the last 12 months have taught us anything, it is that nothing stays the same forever.
The cost-of-living crisis brought on by economic and political instability, soaring energy costs and rising inflation has driven up interest rates, created uncertainty in the markets and squeezed the household budgets of borrowers even further.
This is presenting new found challenges for both borrowers and brokers alike, with some homeowners, mainly driven by fear, having exiting deals and rushed to lock in mortgage rates much earlier than necessary and paying hefty early repayment charges to do so while also paying a premium for a fixed rate product.
Brokers too have been grappling with market fluctuations and short-lived fixed rate product offerings that are making the advice process more difficult than before, forcing them to cast a wider net when considering the most suitable solution for their clients.
In many cases, this has meant looking beyond the headline rate of a fixed mortgage product that may look attractive on the surface, but when you dig a little deeper, may have a sting in the tail such as an LTV requirement of 60% or under, which tends to exclude the majority of people without a significant amount of equity or a large deposit.
This has led to a significant shift towards discounted mortgage products, reversing the trend of recent years, as brokers and borrowers start to understand the increased levels of flexibility presented by these products, and the benefits a discount mortgage can offer in a fluctuating interest rate environment.
Previously, there has been misconceptions around how discount products work, with assumptions made that they are similar to tracker mortgages and move in line with the Bank of England base rate.
However, discounts are tied to the SVR of each lender so any movement is governed independently to any base rate increase or decrease, and many lenders have chosen to freeze or only marginally increase the SVR on their products despite consecutive base rate hikes since December 2021.
This makes them an attractive proposition for those borrowers who may find themselves in a position to overpay their mortgage on occasion and/or those who are able to pay off the mortgage in full via one lump sum somewhere along the line, all without facing any financial penalties.
They also present a viable option for those applicants borrowing two to three times income with more disposable cash and who are able to manage any fluctuations in the repayment amount. For these borrowers, the savings offered by discounted rates may be more suitable than paying a premium for a fixed rate product.
Obviously, a discount mortgage will not be suitable for everyone, and changing the mindset of clients fixated on a fixed will not be easy, but in the current economic climate, ensuring your client gets the best solution for their personal circumstances is crucial.
As mortgage market specialists, brokers are well placed to explore every option available and advise their clients accordingly. This will ensure they get a solution best suited to their needs, and for some, this may well be a discounted mortgage product.
Ashley Pearson is national BDM at The Loughborough for Intermediaries
