Discount mortgages

We all love a discount, but did you know it’s possible to get one on your mortgage? Discount mortgages are attractive because of their low interest rates, but they do mean the amount you pay each month could change.

Read our handy guide to find out how discount mortgages work and whether they’re right for you.

We all love a discount, but did you know it’s possible to get one on your mortgage? Discount mortgages are attractive because of their low interest rates, but they do mean the amount you pay each month could change.

Read our handy guide to find out how discount mortgages work and whether they’re right for you.

Mark Gordon
From the Mortgages team
4
minute read
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Posted 6 MAY 2021

What is a discount mortgage?

A discount mortgage is a type of variable rate mortgage where the interest rate is set below the lender’s standard variable rate (SVR). It’s also sometimes called a discounted variable mortgage.

The SVR is an interest rate set by your lender. While this can be influenced by the Bank of England base rate, it’s not directly tied to it like some mortgages are. That means your lender can change the interest rate you pay at any time and your monthly repayments could go up or down.

Most of the discounts offered tend to only be for a short introductory period, typically two or three years, but it’s possible to get deals that last for the whole of your mortgage term.

How do discount mortgages work?

Any savings you make on a discounted variable mortgage only apply to the interest you pay, not the total amount you’ve borrowed.

For example, if a lender’s SVR is 5% and the discount they’re offering is 2%, the interest rate you’ll pay is 3%. If the lender then raises its SVR to 6%, you’ll still get the 2% discount but your rate would rise to 4%. We’ve rounded up the figures here for simplicity.

An interest-rate rise would see your monthly mortgage payments go up but, on the flip side, a fall in rates would see them go down. Lenders have different SVRs, so it’s not the size of the discount that matters the most, it’s the overall rate.

What happens when the discount period ends?

Once the discount period comes to an end, typically after two or three years, your lender will most likely automatically move you on to its SVR. This could see your monthly mortgage payments rise sharply as you’ll now have to pay a higher rate of interest. That’s unless you switch to a new deal.

In the months leading up to your discounted deal ending, it’s a good idea to start shopping around and comparing remortgage deals to find one that can save you money. It’s also worth building up an emergency savings pot in case your mortgage repayments increase or you can’t switch to a new deal.

All mortgage applications are subject to status and lending criteria and are based on your individual circumstances. Applicants must be 18+ and a UK resident.

Pros and cons of discount mortgages

You can get some great deals with discounted variable-rate mortgages, but there are a few downsides to be aware of.

Pros

  • Cost – your interest rate will stay below your lender’s SVR for the length of the deal, whether it’s two or 25 years.
  • Low interest rates – discounted mortgage rates can be very low, especially in times of economic hardship like the coronavirus crisis, which saw the Bank of England base rate fall to an historic low of 0.1%.

Cons

  • Lack of stability – the interest rate can change by any amount and at any time, so this can make it harder to budget.
  • Discount limit – some mortgages have a ‘collar’ (minimum rate) applied, which means the discounted rate can’t drop below a certain percentage.
  • Payment rise when deal ends – once the discounted deal expires, you’ll automatically move to the lender’s SVR – unless you switch to a new deal, which could mean a big hike in your monthly repayments.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Is a discount mortgage right for me?

If you’re wondering whether a discount mortgage could work for you, think about your attitude to risk and how much disposable income you have.

Do you have the resources to comfortably cope with an increase in your mortgage payments? And are you willing to take the risk that interest rates will stay low? Even a small increase to an SVR can add a significant amount to your monthly bill.

Discount mortgages are best suited to people looking for the lowest interest rates but who can afford to pay more and cope with unpredictability.

They’re not for you if you’re looking for security and are on a tight budget. If you need your repayments to stay the same each month, a fixed-rate mortgage may be a more suitable option.

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