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Discount mortgages

Tom Martin
Written by Tom Martin, Content editor

Edited by Rebecca Goodman, Finance writer, 8 February 2022

Mortgage rate discounts and deals give you a cheaper interest rate than the lender’s standard variable rate (SVR) for a period of between two and five years.
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What are mortgage rate discounts and deals?

Mortgage discounts typically refer to mortgages with a variable rate of interest, meaning the rate can still rise during the offer period if the lender’s standard variable rate (SVR) rises, too.

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A variable rate mortgage discount is simply a discount on the lender’s standard variable rate. If the SVR is 5%, for example, and the mortgage discount is 2%, your rate is 3% for the length of the offer period. However, there are other types of deals and discounts that apply to other kinds of mortgage rates.

What is a discount mortgage?

Just as the term suggests, a discount mortgage offers a reduction of the amount of interest you pay on your mortgage for a set period of time. 

How do discount mortgages work?

Discounts usually last for two or five years. Mortgage discounted periods can apply to:

  • Fixed rate mortgages. A fixed rate mortgage deal gives you a discount on the current standard variable rate, but keeps the interest rate the same irrespective of any changes elsewhere. So, if the SVR rises, your interest rate remains the same. This goes both ways, so if the SVR goes lower, meaning you would normally pay less, your fixed interest rate stays the same.

  • Variable rate mortgages. A variable rate discount mortgage is based on the lender’s current standard variable rate. This sees you pay a fixed percentage less than the SVR for the offer period. That means if the SVR rises or falls, the rate you pay changes accordingly. 

  • Tracker rate mortgages. Tracker mortgages follow the trajectory of the Bank of England’s interest rates. They are very similar to standard variable rate discount deals, but rather than rising or falling with your lender’s standard variable rate, they are tied to the Bank of England’s base rate.

How much can I save with a discount mortgage?

Your savings depend on the mortgage you have, the size of the discount and how long it applies. When comparing mortgages, it is best not only to compare the discounted interest rates, but also look at the standard variable rates, because 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 fees, such as mortgage valuation costs, when calculating how much a mortgage will cost you. 

What happens when your discounted period ends?

At the end of the discounted period, your mortgage rate usually rises. It is likely to move to whatever rate was agreed when you took out the mortgage. This depends on the type of mortgage, but is usually the lender’s SVR. 

If you know your mortgage costs are about to rise, you should start comparing remortgage deals. Remortgaging enables you to switch to a new mortgage provider that also offers you an introductory discounted rate, so you can continue to avoid paying your mortgage at the standard variable rate.

Pros and cons of discount mortgages

Pros

  • Lower mortgage costs than your lender’s SVR

  • Cheaper interest if the lender reduces its rate

Cons

  • Your monthly payments may not be the same each month

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

  • There may be a cap on your costs if the SVR falls below a certain point

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 standard variable rate has changed over the course of the introductory offer period.

Lenders are free to change their standard variable rate whenever they like, but it normally moves in line with the Bank of England’s base rate.

Irrespective of this, you are still likely to pay more than you were paying on your discount rate once that deal ends.

How can I get a discounted rate mortgage?

There are lots of mortgages on offer and applying for a discounted rate mortgage is the same as applying for any other type of mortgage.

You need to calculate all the costs fully and consider things such as how you think the economy will perform in the next few years and how the Bank of England is likely to react. 

Shorter mortgage deals can often be much cheaper than longer deals. Longer deals may not offer the best discounts, but you gain a little peace of mind about how much you will be paying over the next five years.

Flexibility should also be a deciding factor when comparing different discount lengths. You may want to be flexible with your mortgage and take out a shorter deal, so you can remortgage to a better rate. You may also consider a shorter mortgage deal, because you believe the Bank of England’s base rate will go down, and locking yourself into a discounted deal for too long means you’ll miss out.

On the other hand, if the Bank of England rate looks set to rise, the security of a longer deal is obviously more appealing and keeps your costs lower for longer. 

What are early repayment fees?

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 also means you can potentially save thousands of pounds in interest.

However, making mortgage overpayments could result in early repayment fees. Most mortgage providers give you the option to make mortgage overpayments of up to 10% of the mortgage value before fees are charged, but each lender has its own rules.

Early repayment fees are penalties for going over the mortgage overpayment threshold, and are usually between 3% and 5% of the amount you overpaid.

What about cashback mortgages?

Some mortgages also offer extra deals alongside discounted interest rates. These include discounts and refunds on the various fees associated with the mortgage application and home-buying process, such as legal and set-up fees, and occasionally stamp duty.

There are also cashback mortgages, which give you cash upfront once the application has been finalised.

Many of these deals may look impressive at first, but they 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.

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