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What is a discounted mortgage?
A discount mortgage is a type of variable rate mortgage where the lender offers you a discount on its standard variable rate, or SVR, for a fixed period of time, typically a couple of years. Once you come to the end of that period, you start paying the more costly SVR, unless you remortgage onto a better deal.
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How do discount rate mortgages work?
All lenders set their own standard variable rate, and it’s the rate you move onto at the end of any initial variable or fixed-rate period. A discount rate mortgage tracks that SVR, but at a discount. So if the lender’s SVR is set at 5%, and the discount is 2%, the interest rate on your mortgage will be 3%.
As lenders set their own SVRs, they can vary significantly: two lenders offering a 2% discount may end up charging significantly different rates. Similarly, the size and length of the discount will vary between lenders and their loans.
Pros and cons of discount rate mortgages
| Advantages | Disadvantages |
| Rate is lower than the lender’s SVR while the discount period lasts | The rate you pay could rise if the SVR rises |
| The rate you pay could fall if a lender lowers its SVR | A variable rate can make it harder to budget for payments |
| Early repayment charges tend to be cheaper than on fixed rate mortgages | There may be a ‘collar’ that your rate can’t drop below |
Should I get a discounted mortgage?
The main attraction of a discount rate mortgage is that the interest rate charged is generally — but not always — lower than fixed rates on offer. With a fixed-rate mortgage, borrowers are charged a premium for the certainty in knowing precisely what their monthly repayments will be.
Should you find a discount mortgage with a lower rate than a fixed mortgage, you’ll enjoy smaller repayments at the outset. However, there is far more uncertainty with a discount rate mortgage than with other types of mortgage.
With a tracker mortgage, for example, your rate follows the bank base rate set by the Bank of England, so your rate changes only when the base rate does. But with a discount rate, your rate can change at any time, as lenders can adjust their SVRs whenever they like.
It’s not just the frequency of rate changes, but the size of them too. A lender could choose to increase their SVR substantially, meaning a more significant increase to your monthly bill.
» MORE: Variable vs fixed-rate mortgages
How can I get a discounted rate mortgage?
Discount mortgages tend to be less popular than fixed rates, and there are usually fewer discounted mortgage rate options available. One way to find out what discounted mortgages are available is to use a mortgage comparison site.
Another option would be to approach an independent mortgage broker. They will be able to search the market to find the best deal for you, whether that’s a discount mortgage, another variable rate mortgage or a fixed-rate mortgage. A broker is also likely to have access to lenders that don’t offer their mortgages directly to borrowers and will know which lenders are most likely to accept your application.
» MORE: Current mortgage rates
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