At a glance
A discount mortgage has a variable interest rate set below the lender’s standard variable rate.
Discount mortgage deals usually last for two to five years...
...But it’s also possible to get ‘lifetime discounts’ which last the whole mortgage term.
Discount mortgage rates can be low, but they can also increase at any time.
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. 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 to five 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 apply only to the interest rate you pay, not the total amount you’ve borrowed.
For example, if a lender’s SVR is 6% and the discount it's offering is 2%, the interest rate you’ll pay is 4%. If the lender then raises its SVR to 7%, your rate would rise to 5%.
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 focus on the overall rate rather than the size of the discount when comparing mortgages. (Take fees into account, too, as they can add thousands to your bill.)
What happens when the discount period ends?
Once the discount period comes to an end, typically after two to five years, your lender will most likely automatically move you on to its SVR.
This could see your monthly mortgage payments rise sharply, so in the months leading up to your discounted deal ending it’s a good idea to start comparing remortgage deals.
Pros and cons of discount mortgages
Pros of discount mortgages
Lower than your lender's standard variable rate of interest – you'll pay a lower interest rate than your lender’s SVR for the length of the deal
You benefit if interest rates fall – if rates decrease, so will the amount you pay each month.
Cons of discount mortgages
Lack of stability – the interest rate can change by any amount at any time, which 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
You suffer if interest rates rise – if your lender's SVR increases, so will the amount you pay each month.
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 do you think interest rates will remain stable or go lower? Even a small SVR increase can add a significant amount to your monthly payments.
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 or 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.
Is now a good time to get a discount mortgage?
Whether a discount mortgage would be the right deal for you just now will depend on your personal circumstances – including your credit rating, how important certainty about the size of your payments is to you, and when you're likely to move house – as well as the wider economy.
If economists predict interest rates will fall over the coming months, a discount mortgage could be a savvy option. But if rates are more likely to go up, a variable-rate mortgage such as a discount deal might be less appealing.
If you’re not sure what kind of mortgage would be right for you, talk to an expert at our partner London & Country. You’ll get fee-free advice and someone to discuss the potential options and their pros and cons for your situation, so you can make an informed decision.
Your home may be repossessed if you do not keep up repayments on your mortgage.
FAQs
Can I take a discount mortgage with me if I move house?
If you think there’s a chance that you’ll move during the discounted period of the mortgage, you’ll need to look for a deal that includes the ability to port your mortgage to another property.
Can I get a discount mortgage if I’m remortgaging?
Yes, discount mortgages are a potential option for all borrowers including anyone looking to remortgage.
Don’t forget to check for early repayment charges on any existing mortgage and any costs and fees on your new deal to make sure remortgaging is worthwhile.
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With over 10 years’ experience writing, editing and managing content, Emma has written and edited for some of Australia’s leading financial comparison brands, including Savings.com.au, Your Investment Property Magazine, and Your Mortgage.
Ele Clark is an award-winning editor who has held leadership roles at Which? and news-stand publications in London and Dubai. She’s appeared across the press and media, including BBC’s Panorama. With almost 20 years’ experience in personal finance, insurance and consumer journalism, she leads a talented team at Compare the Market, creating insightful, accessible content to help people make informed financial decisions.
Sajni is passionate about finding money products to help you make great financial decisions. She keeps track of the latest trends and evolving markets to find new ways to help you save money.
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