Consumers beware of discount mortgage products

18 July 2008 / by Rachael Stiles
Discount mortgages might not be the great deal that they can initially seem to be, as the inflated interest can quickly swallow up any savings made from the discount.

CHL Mortgages is urging caution regarding discount mortgages, that might seem like a good deal to a first time buyer who is strapped for cash or a homeowner looking to remortgage amid higher interest rates, but which might not be what they seem.

Once interest rates are taken into account, any potential savings made on the discount mortgage could be equalled or overtaken, leaving the mortgage customer worse off than they might have been with another type of mortgage.

While it accepts that current mortgage conditions will make these deals attractive to those looking for the cheapest mortgage deals, those which are sold with particularly attractive discounts could end up "contributing to a much greater payment shock" when the special rate comes to an end, CHL said.

The decline in house prices, tighter lending conditions, inflationary pressures and interest rates on household budgets and the Bank of England, and fewer lenders on the market than this time last year are all contributing factors, and are subsequently driving CHL to urge the industry to reconsider the use of heavy discounts.

More than 1.4million customers are expected to reach the end of special discount deals this year, so CHL believes this is an appropriate juncture at which lenders should maintain prudent risk management and ensure that customers be treated fairly.

Jannie Vermeulen, head of credit risk at CHL Mortgages, commented: "The problem with discounted products, especially those that are deeply discounted, is the assumptions that come with them. These products are designed under the notion that customers can remortgage at the end of the discounted period when their property is worth more. The reasons behind these products are understandable – competition, sales targets, affordability and innovation.

"However, one must wonder if Treating Customers Fairly initiatives are being met if a borrower reaches the end of the discounted rate and experiences a 20-40% mortgage payment increase, at a time when they also have less chance of securing another mortgage. In this sense we would urge all risk executives, industry bodies and regulatory authorities to consider the depth of the discount along with its consequences."

CHL has currently withdrawn from the mortgage industry and is redesigning its mortgage range in order to better reflect the current market in preparation of re-entering the market later in the year.

© Fair Investment Company Ltd