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About Mortgages

Discount mortgages come with an interest rate that is set at a certain point below the lender's standard variable rate.

Think carefully about securing debt against your home. Your home may be repossessed if you do not keep up repayments on your mortgage

Last updated on 07 March 2022.

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.

Discount Rate Mortgages FAQs

What is a discount rate mortgage?

A discount rate mortgage, or a discount variable rate mortgage, is when the interest rate is set at a certain level below the lender’s standard variable rate, or SVR, for an agreed period. As the SVR of the lender changes, the discount rate mortgage changes with it. These loans track the rate set by the lender, rather than tracking the Bank of England base rate. This means that lenders can change the rate you are paying whenever they choose.

What is the difference between a discounted and fixed mortgage?

A discount mortgage is a kind of variable-rate mortgage that tracks the lender’s standard variable rate. The interest rate you pay can change during your deal.

On the other hand, interest rates on fixed mortgage deals don’t change. They remain the same for the duration of the fixed-rate period.

» MORE: Variable vs fixed-rate mortgages

How much can I save with a discount mortgage?

This depends, and you may not always save money by choosing a discount mortgage. Interest rates on discount mortgages will typically be a certain percentage point below the lender’s standard variable rate, but the exact amount will vary. However, while these mortgages may be able to save you money on interest initially, if the SVR rises, you may end up paying more than if you had taken out a fixed mortgage deal, for example.

Is now a good time to get a discount mortgage?

It may be a good time to get a discount mortgage if interest rates are currently low and are predicted to remain relatively stable. If rates increase, it’s likely that the rate on your discount mortgage and your payments would increase, potentially making it a more expensive choice. However, it can be hard to predict when a lender will change their SVR so, even if rates seem low and stable, there will always be a risk that your payments will change.

When do discount mortgage rates change?

Discounted mortgages are not directly affected by the base rate for the Bank of England. Instead, they mirror the lender’s SVR which they can change at their discretion, even when the base rate stays the same.

What's the difference between discount and tracker mortgages?

The difference is that a tracker mortgage typically follows the Bank of England base rate with a few percent added, and a discount mortgage follows the SVR of your lender. While the lender’s SVR is often influenced by the base rate, it may not exactly follow it.

How long will a discount mortgage last?

Most discount mortgages are available across different terms, usually between one and five years. However, some providers may offer longer discounted periods.

Should I get a discount mortgage?

You may want to consider a discount mortgage if you like the idea of getting a lower interest rate than your lender’s SVR. In some economic circumstances, this can mean that your discount mortgage comes with a very low level of interest. However, discount mortgages are not ideal if you want to know exactly what you’ll pay each month as lenders can change their interest rates and cause your monthly payments to rise.

What are the risks of discount mortgages?

Because a discount mortgage tracks the SVR of your lender and you have no control over this rate, your interest rate and monthly payments could change at fairly short notice. You need to make sure you would be able to cope if your payments increased. If rates did increase, you could end up paying more than if you had taken out a different deal.

Can I leave my discount mortgage if the rate increases?

If you can find a cheaper mortgage deal, you might consider leaving your current deal and switching mortgage providers. However, you should be aware that most lenders will require you to pay an early repayment charge for this. Always check to see whether the discount mortgage comes with any charges like this before applying.

How can I protect myself at the end of a discount mortgage?

When your discount rate deal ends, you will be automatically transferred to your lender’s standard variable rate, which normally means your monthly repayments will increase. As a result, it is a good idea to start shopping around for a new mortgage deal several months before the end of your current term. Consider whether you want a tracker, fixed, or discount mortgage, and remember to factor in any arrangement fees.

Are there early repayment charges for discounted mortgages?

If you want to leave a discount mortgage early and switch to a new deal, pay off your mortgage early, or make an overpayment, you may need to pay an early repayment charge. Many lenders will let you overpay up to 10% of your outstanding balance each year before charging a fee. Check the terms of your mortgage to see if there are any early repayment charges and how much they cost.

Are there any alternatives I should consider?

If you want more security and you are worried about your payments rising, you may want to consider locking into a fixed mortgage deal.

If, however, you like the idea of a variable mortgage, discount mortgages are not your only option. For example, you can get tracker mortgages, which follow the Bank of England’s base rate rather than the lender’s SVR. You can also choose to go on the lender’s SVR, though this is unlikely to offer you the best rates.

NerdWallet has selected Koodoo to provide you with this information-only online comparison service on a non-advised basis. NerdWallet will receive a share of the commission that Koodoo earns from the lender or from our partnered broker, Fluent Mortgages.

Koodoo is the trading name of Mortgage Power Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 845978), and is a registered company in England and Wales (company registration number 10978680), with a registered address at Scale Space, 58 Wood Lane, London, W12 7RZ

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