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Published 12 September 2023
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Discount Mortgages: Is a Lower Rate Worth the Risks?

A discount rate mortgage tracks a lender's standard variable rate, but at a discount. There are pros and cons to this sort of loan.

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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 a discount rate 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.

In addition, discount rate mortgages often come with early repayment charges (ERCs). This is a charge you have to pay if you want to repay the mortgage early, including when remortgaging to a new deal. An ERC is calculated as a percentage of the sum being repaid, and so can run into the thousands of pounds. As a result, if you sign up for a discounted rate mortgage and find that the interest rate is moving higher than a level you are comfortable with, it could potentially cost you a significant amount to move to a different product.

» 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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