Compare Discount Mortgages

What is a discount mortgage?

A discount mortgage is a type of variable rate mortgage where the lender offers you a discount on its standard variable rate (SVR) for a set period of time, typically up to five years.

The interest rate on the discount mortgage will stay a certain level below the lender’s SVR for the agreed period. This means that if the lender raises or lowers the SVR, the interest rate on your discounted mortgage will change accordingly.

Once you come to the end of that period, you start paying the lender’s more costly SVR, unless you remortgage to a new deal.

How do discount rate mortgages work?

A discount rate mortgage tracks a lender’s standard variable rate, 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%.

Whether the SVR increases or decreases, your discount mortgage rate will remain the same level below it, in this case 2%. So if the SVR increases to 6%, your rate would then rise to 4%.

Because the interest rate moves in line with the SVR, the amount you pay on your mortgage each month can change.

Lenders will offer different discounts and, as they set their own SVRs too, rates can vary significantly. Two lenders offering a 2% discount may end up charging significantly different rates, while lenders offering different discounts may end up charging similar rates because of how they structure their SVRs. So bear in mind that the biggest discount won’t necessarily offer the lowest rate.

Most discount periods will last between two and five years, but there may be longer discount deals available.

Lenders can increase or decrease their SVR whenever they like, regardless of the Bank of England base rate. Although lenders’ rates are typically influenced by the base rate, they could choose to raise their SVR even if the base rate stays the same.

Many discount mortgages will have a bottom limit, or ‘collar’, which stops the interest rate falling below a certain figure.

What are the advantages of a discount mortgage?

Discount mortgages have several advantages, including:

• The interest rate will stay below the lender’s SVR.
• They may have lower interest rates than fixed-rate mortgages and other variable mortgages, at least initially. But make sure you check the rates of other mortgages as this may not always be the case.
• If the lender lowers the SVR, you will benefit from lower rates and smaller payments.

What are the disadvantages of a discount mortgage?

Despite the benefits, there are some potential downsides to discount mortgages, including:

• They have more uncertainty than fixed-rate mortgages because your payments can change if the lender changes their SVR. This can make it more difficult to budget as your payments could increase at short notice.
• Lenders can increase their SVR, which the discount rate is based on, at any time and by any amount, regardless of the Bank of England’s base rate. Even a small increase could have a major impact on your payments.
• You may need to pay early repayment charges if you want to leave the discounted deal early.
• There may be a lower limit, or collar, which means your discount rate won’t fall below a certain amount. This could limit how much you benefit from any drops in the SVR.

Is a discount mortgage right for me?

If interest rates are low and they are predicted to stay that way, you may want to consider a discount mortgage. However, there is still no guarantee that rates won’t rise.

If interest rates are expected to rise in the near future, this could mean the rate on your discount mortgage is likely to increase too. With discount mortgages, there is always a risk that your payments will increase as well as fall, so you need to be able to afford your payments if this were to happen. If interest rates do rise, it’s possible that a discounted rate could end up costing more than a fixed-rate deal, which originally seemed more expensive.

You should compare the rates on discount mortgages with fixed-rate deals and other variable rate mortgages to see if any of those options are better for you.

Even if the discount mortgage is the cheapest option, you need to decide whether the difference in cost is enough reason to choose that deal compared to the certainty offered by a fixed-rate deal, for example.

Discount mortgages come with some uncertainty because rates could change. Fixed deals can offer more security as your payments stay the same for the specified period, so, if you’re on a budget and you’re worried about your payments increasing, a fixed-rate mortgage may be more suitable than a variable rate.

How can I get a discounted rate mortgage?

Not all lenders offer discount mortgages, but there is still a selection to choose from. You can use NerdWallet’s comparison tool to find out what discounted mortgages are available and assess which deal might suit you.

Don’t just consider the size of the discount but also the lender’s SVR and the interest rate you’ll be paying to help you work out which option to choose.

You should also look at the annual percentage rate of charge (APRC), which tells you the total annual cost of fees and interest across the entire term of mortgage. It takes into account the discounted rate and then the rate you would move on to after the discount period ends, assuming you won’t remortgage to a new deal.

If you need more help and guidance on applying for a mortgage, then consider contacting a mortgage adviser.

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