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What are discount mortgages?
A discount mortgage is a home loan on which the interest rate is pegged at a set amount below the lender’s standard variable rate (SVR), which is the interest rate your lender charges once your initial deal has ended.
The interest you pay on your mortgage each month will therefore rise and fall in line with the SVR. However, it will always remain a set amount cheaper for the term of the deal.
The mortgage rate discount can either be in place for a fixed period such as three or five years or for the lifetime of the mortgage.
How do discount variable-rate mortgages work?
Discount variable-rate mortgages work in the same way as a fixed or variable-rate mortgage. You make monthly repayments to pay off the capital (the amount you borrowed to buy your property) and the interest you owe. The payments are calculated to ensure you pay off everything by the end of the mortgage term, at which point you own the property outright.
However, with a discount variable-rate mortgage, the interest rate is usually set at one or two percentage points below the lender's SVR. So, if your mortgage lender decides to change their SVR, your discount mortgage rate will change too. Your monthly repayments can go up or down as a result.
For example, if your mortgage offers a 1.5% discount and the SVR is currently 5%, your interest rate will be 3.5%.
If your lender’s SVR goes up to 6%, your new interest rate will be 4.5%, and your repayments will increase.
If your lender’s SVR goes down to 4%, your new interest rate will be 2.5%, and your repayments will reduce.
The bank or building society decides how and when to adjust its SVR based on several factors, including its borrowing costs and internal targets. And while not explicitly linked to the base rate set by the Bank of England, SVRs are often influenced by this rate.
Lenders also often impose a “floor” which your interest rate cannot fall, so your monthly repayments never drop below a certain amount.
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How much can I save with a discount mortgage?
That depends. A discount mortgage rate is generally a couple of percentage points lower than the lender’s SVR. This means that most of the time you’ll save money compared to a variable-rate mortgage with no discount.
However, discounted mortgages might still turn out to be more expensive than fixed-rate or other tracker mortgages. This depends on what happens to interest rates and the other factors that determine your lender’s SVR.
When interest rates are low, mortgage discounts of this kind tend to offer very good value. But when interest rates rise, your monthly payments could become expensive.
If you want the security of paying the same amount every month for the duration of your deal, you may wish to consider a fixed-rate mortgage.
How long does a discounted mortgage deal last?
Most discount mortgage rates only last for a set period – usually two, three or five years. But some last longer, and some discounts - known as lifetime discounts - are guaranteed for the whole term of the mortgage, which is usually 25 years.
However as a rule of thumb, the longer the deal, the smaller the discount.
Remember too that if you want to switch mortgage deals before the discounted term ends, you will usually be charged an early repayment fee for doing so.
Once the term ends, you are generally automatically switched to the lender’s SVR, unless you switch and move to a new mortgage deal.
Advantages and disadvantages of a discounted mortgage
Discount rate mortgages FAQs
What happens when the discount ends?
You'll automatically be moved to the lender’s standard variable rate (SVR), meaning you might pay more each month. At this point, you can usually save money by remortgaging to a new deal, either with the same lender or a different one. You can choose another discount mortgage, a tracker or a fixed-rate deal.
How low can my rate fall?
Most discount mortgages give a minimum rate in their terms and conditions. Even if the SVR falls, your interest rate cannot go below this level, often known as a “floor”.
Can I pay off my mortgage before the term ends?
Yes, but many lenders will charge you for this. Discount mortgages usually impose an early repayment fee if you repay your mortgage or switch deals before the discount period ends.
Will applying for a mortgage give me a bad credit rating?
All credit applications appear in your credit file. So, if you’re rejected, this can negatively affect your score, and being rejected by lots of lenders can significantly damage your rating.
For this reason, it’s best to only apply for deals you think you have a good chance of getting, and to space out your credit applications by three to six months.
A successful application can also change your score – this could be an improvement as you’ve got a mortgage or a temporary drop because you have more debt.
Can first-time buyers get a discount mortgage?
Yes, some discount mortgages are available to people who are looking to buy their first home.
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