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Discount mortgages
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What is a discounted mortgage?
A discounted mortgage has a variable interest rate at a set percentage below the lender's standard variable rate (SVR).
Usually discount mortgage deals last for two to five years, but can sometimes be longer. Because it's a variable interest rate, it will change whenever the SVR does, but the discount size remains constant.
Example: If your lender’s SVR is 5% and the discount is 2%, your initial rate is 3%
If the SVR rose to 6% your discount remains at 2%, so your new rate is 4%
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How do discount mortgages work?
Discount mortgages are variable rate mortgages whereby you pay a fixed percentage less than the lender’s current SVR during the offer period. If the SVR rises or falls during that time, your rate of interest will change in line with that, but the percentage of the actual discount remains the same.
This is similar to tracker mortgages, which also rise and fall in line with a followed rate, although the vast majority of trackers follow the Bank of England base rate rather than your lender’s SVR. This means that it can be easier to determine when a rise in rates may be due, by following the economy and base rate movements.
If you would prefer more certainty when it comes to your mortgage repayments, a fixed-rate mortgage may be more suitable.
Advantages of discount mortgages
Can be cheaper than other rates initially due to the discount
As it's a variable rate, your mortgage repayments could reduce further, if the lender reduces their SVR
Disadvantages of discount mortgages
Your monthly payments can rise without warning, meaning your outgoings could change from one month to the next
There may be a cap on how much your payments fall - even if the SVR falls. This will minimise the amount you can save
How much can I save with a discount mortgage?
The savings you can make with a discounted mortgage rate depends on the size of mortgage you need, the discount you’re offered, and how long it applies for.
When comparing mortgage 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.
It's also a good idea to compare them with fixed and tracker rate deals with other lenders. SVRs are typically higher than other mortgage rates, so a relatively small discount might not necessarily be the best deal on the market.
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 interest rate reverts to the lender’s full SVR, so the rate you're currently paying, but without the discount element.
It's a good idea to start comparing remortgage deals a few months prior to the end of your discounted period to avoid this.
Remortgaging enables you to switch to a new mortgage provider who could offer you a new introductory rate. This could be another discounted rate, or you could try a tracker rate or fixed-rate mortgage deal instead.
You may also be able to transfer onto a new deal with your existing lender - known as a product transfer.
Discount rate mortgages FAQs
How much will my mortgage go up when my discount ends?
This all depends on how much your discount was and how much the lender’s SVR has changed over the course of the introductory offer period.
Lenders are free to change their SVRs whenever they like, but - for competition reasons - they tend to move up and down in line with the Bank of England’s base rate.
Irrespective of this, you will still pay more than you were paying on your discount rate once that deal ends.
What are early repayment fees?
Early repayment charges (ERCs) are penalties for leaving a deal before the end of the term. They tend to be higher at the beginning of the deal period and reduce towards the end, but can be multiple thousands of pounds in some cases.
Some lenders also charge ERCs if you overpay your mortgage by more than a certain amount per year, usually 10% of the balance.
What is the difference between discount mortgages and cashback mortgages?
Discount mortgages offer a lower rate of mortgage interest for a set period of time; cashback mortgages give you cash upfront once your mortgage application has been finalised.
Cashback can be a feature of a discount mortgage, just as it can be offered with a fixed-rate or tracker deal. However, while cashback deals can look impressive at first, they often come at the cost of a less impressive discount on the interest rate, so you need to weigh up what is more important to you: short-term or long-term benefits.
Can I pay off my mortgage before the term ends?
If you want to cut down the time it takes to pay off your mortgage, you can make overpayments – where you pay more than your contracted monthly fee. Doing this can save you thousands of pounds in interest.
But while most mortgage lenders allow you to overpay by a certain amount - say up to 10% of the mortgage value - penalty-free, making larger mortgage overpayments during your initial deal period could result in early repayment fees (see above).
Is a higher discount on the rate more risky?
The level of discount you get on your discount rate has no impact on the level of risk involved in using this rate type. A discount rate is risky because it's a variable rate, which means it can go up during the initial term - more specifically, whenever the lender decides to change their SVR.
You could argue that a larger discount might lead you into a false sense of security. This is true at any discount level, but the larger the discount, the larger the jump in payments will be once the discount period ends, and you revert to the lenders full SVR.
However, having a larger discount, doesn't increase the chance of this happening - so as long as you're aware, discount rates can be a useful way to reduce your initial monthly mortgage repayments.
YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
The FCA does not regulate mortgages on commercial or investment buy-to-let properties.
Uswitch makes introductions to Mojo Mortgages to provide mortgage solutions. Uswitch and Mojo Mortgages are part of the same group of companies. Uswitch Limited is authorised and regulated by the Financial Conduct Authority (FCA) under firm reference number 312850. You can check this on the Financial Services Register by visiting the FCA website. Uswitch Limited is registered in England and Wales (Company No 03612689) The Cooperage, 5 Copper Row, London SE1 2LH. Mojo Mortgages is a trading style of Life's Great Limited which is registered in England and Wales (06246376). Mojo are authorised and regulated by the Financial Conduct Authority and are on the Financial Services Register (478215) Mojo’s registered office is The Cooperage, 5 Copper Row, London, SE1 2LH, and head office is WeWork No. 1 Spinningfields, Quay Street, Manchester, M3 3JE. To contact Mojo by phone, please call 0333 123 0012.