Discounted variable vs tracker - comments on MSE

thejinkazama

Hello,

in the most recent update on mortgages following the u-turn, the MSE site includes a quotation from a mortgage broker regarding discounted variables and trackers. 

"All things being equal, the benefit of a discount deal over a tracker is that a tracker rate is guaranteed to rise in line with base rate. If you've got a discount off SVR on the other hand, it's unlikely that banks will put up their SVR by as much, or as quickly, as the base rate.

"So although in the real world certainty has some value, if that certainty of a tracker means you are guaranteed to see your rate increase in line with the base rate, whereas the lack of certainty with a discount means you're unlikely to see it go up as quickly, there is some value in not having certainty.

Where do you stand on this? I’m fairly new to this business and had initially ruled out discounted variables given the option for lenders to increase the SVR when they like. This viewpoint has got me thinking about them in a more positive light again. 

Nailer99

It’s something I’ve wondered. SVRs have stayed at around 6% while BoE interest rate was near zero. 

Back in the day when BoE interest rates were 6% I can’t remember SVRs being as high as 12% (though it was a long time ago). 

I don’t think anyone really knows though how SVRs will respond to this new interest rate increase. 

Pulpdiction

In 2000 when BOE base rate was about 6% my first mortgage was 3.95%, a discount off base rate.  There's something wrong with the banking system again after 2008 in that there seems to be little in terms of real competition or value in the market place. Rates at the moment are downright robbery, yet the regulator is MIA.

housebuyer143

The thing is no one can tell you how high a lender is going to increase the SVR to or how often. They might decide overnight. It's 2% too low and put it up.
Yes they haven't increased them that much now but that's not to say they won't in the future. I personally prefer a tracker because of the base rate goes up, your rate goes up but if the base rate goes down your rate comes down. There's no guarantee on the SVR that will happen.

superstylin

@housebuyer143 I think that's why @thejinkazama is undecided. Everything I've read about discounted and trackers tells you that trackers are the preferred option but the broker MSE quoted recently seemed to say otherwise:

"All things being equal, the benefit of a discount deal over a tracker is that a tracker rate is guaranteed to rise in line with base rate. If you've got a discount off SVR on the other hand, it's unlikely that banks will put up their SVR by as much, or as quickly, as the base rate."

"So although in the real world certainty has some value, if that certainty of a tracker means you are guaranteed to see your rate increase in line with the base rate, whereas the lack of certainty with a discount means you're unlikely to see it go up as quickly, there is some value in not having certainty."

housebuyer143

superstylin said:

@housebuyer143 I think that's why @thejinkazama is undecided. Everything I've read about discounted and trackers tells you that trackers are the preferred option but the broker MSE quoted recently seemed to say otherwise:

"All things being equal, the benefit of a discount deal over a tracker is that a tracker rate is guaranteed to rise in line with base rate. If you've got a discount off SVR on the other hand, it's unlikely that banks will put up their SVR by as much, or as quickly, as the base rate."

"So although in the real world certainty has some value, if that certainty of a tracker means you are guaranteed to see your rate increase in line with the base rate, whereas the lack of certainty with a discount means you're unlikely to see it go up as quickly, there is some value in not having certainty."

It's going to be personal choice because they both have their merits. It's like why some people pick fixed over trackers. 
There is no right or wrong choice, and both can have their pluses and minuses. They are not necessarily better than a tracker, just aimed at a different kind of customer.