What is a discounted rate mortgage?
A discounted rate mortgage is a type of variable-rate mortgage that uses the lender's Standard Variable Rate (SVR) as its reference point.
With a discounted rate mortgage, the interest rate is set at a specific percentage below the SVR for a predetermined period.
How do discounted rate mortgages work?
The Standard Variable Rate (SVR) is determined by each lender, and they set this rate independently.
While lenders often consider the Bank of England base rate and may adjust in line with its changes, there is no guarantee they will do so. Since the SVR differs between lenders, it’s important to compare the actual rate you’ll be signing up for rather than focusing solely on the discount offered.
What the benefits of discounted rate mortgages?
If you are planning to move house or anticipate a change in your circumstances, a discounted rate mortgage with a shorter initial term could be a good option.
Compared to standard SVR mortgages, discounted rate mortgages can offer more favourable terms, making them a cost-effective choice during the discounted period.
What are the disadvantages of discounted rate mortgages?
As with tracker mortgages, the interest rate on a discounted rate mortgage can rise or fall, which means your repayments will fluctuate. Many people prefer the stability of a fixed-rate mortgage, which provides certainty and makes budgeting easier.
Discounted rate mortgages can offer low-interest rates, but excellent deals are also available with tracker or fixed-rate mortgages. Some discounted mortgages include a "collar," meaning there is a minimum rate below which the interest cannot drop.
Since the SVR is set by the lender, there is less transparency regarding interest rate changes, making it harder to predict future adjustments.
What should I watch out for?
Pay close attention to the wording regarding the rate—does it refer to the discount or the actual rate?
This distinction can sometimes be unclear and significantly impact your mortgage repayments.
As with all mortgages, once the initial term ends, you will revert to the lender's SVR, which often results in a sudden increase in interest rates and monthly payments. We recommend organising a new mortgage well in advance—up to six months before your deal expires—to avoid any unexpected rises in costs.
Which lenders offer discount rate mortgage?
There are many discounted rate mortgages available on the market.