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Discount mortgages

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What is a discounted mortgage?

A discount mortgage offers a reduction of the amount of interest you pay on your mortgage for a set period of time - allowing you to pay a cheaper interest rate than the lender’s standard variable rate (SVR) for say two or five years. 

Example: If your lender’s SVR is 5% and the mortgage discount is 2%, your initial rate will be 3%.

However, discount mortgages have variable rates of interest, meaning the rate will rise if the lender’s SVR goes up during the offer period. 

If you would prefer more certainty about your interest rate, you can look at other kinds of mortgage rates such as fixed rates.

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How do discount mortgages work?

Most mortgage deals offer you a discounted rate for an initial period of between two and five years, although some can last for up to 10 years.

Discount mortgages are variable rate mortgages with which you pay a fixed percentage less than the lender’s current SVR for the offer period. If the SVR rises or falls during that time, the rate you pay therefore changes accordingly. 

Tracker mortgages, meanwhile, follow the trajectory of the Bank of England’s interest rates. They are very similar to SVR discount deals but rise and fall in line with the Bank of England base rate rather than your lender’s SVR.

When comparing discounted rate mortgage deals, it is therefore important to consider things such as how you think the economy will perform in the next few years and whether that will prompt the Bank of England to raise the base rate of interest most mortgage rates are based on.  

For greater certainty about your mortgage costs during the initial period, you may also want to consider fixed-rate mortgages, which give you a discount on the current SVR, but keep the interest rate the same irrespective of any changes elsewhere.

How to compare discount mortgage rates

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How much can I save with a discount mortgage?

Your savings depend on the size of mortgage you need, the discount you’re offered, and how long it applies. 

When comparing deals, look at both the discounted interest rates and the SVRs they are linked to, as this is what you will pay unless you switch deals at the end of your offer period. 

You also need to factor in any extra costs, such as the mortgage arrangement fee, when calculating how much a mortgage could save you. 

What happens when your discount mortgage ends?

At the end of the discounted period, your mortgage rate reverts to the lender’s SVR, which will be higher than the rate you’ve been paying. 

As you know your mortgage costs will rise once you move on to the SVR, you should therefore start comparing remortgage deals a few months prior to the end of your discounted period. 

Remortgaging enables you to switch to a new mortgage provider that offers you a new introductory rate, which could be another discounted rate, fixed for the initial period, or linked to movements in the Bank of England base rate.

You may also be able to transfer onto a new deal with your existing lender.

Advantages of discount mortgages

  • Lower mortgage costs than your lender’s SVR

  • Cheaper interest if the lender reduces its rate

  • Allow you to switch penalty-free at the end of the discounted period

Disadvantages of discount mortgages

  • Your monthly payments may not be the same each month

  • When the discount ends, your mortgage costs could rise significantly

  • There may be a cap on how much your payments fall - even if the SVR plummets

Discount rate mortgages FAQs

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