What is a Discount mortgage?

A discount mortgage, also known as a discounted variable mortgage, is a mortgage type that provides a specific reduction from the lender's standard variable rate (SVR) for a predetermined period called the deal period.

Since it is a variable rate mortgage, the interest rate will vary with changes in the lender's SVR, leading to potential fluctuations in your monthly mortgage payments during the deal period. For instance, if the lender's SVR stands at 5% and your discount rate is -2%, you will be charged 3% interest on your mortgage.

If you prefer a more stable payment structure, you might want to consider opting for a fixed-rate mortgage instead. Alternatively, if you prefer your interest rate to follow the Bank of England base rate, a tracker mortgage could be a suitable option.

How does a discount mortgage work?

A discount mortgage offers an interest rate that is determined by a specified reduction from the lender's standard variable rate (SVR). This discount is established at the beginning and typically remains fixed for a set period, commonly 2 or 5 years. While the discount rate remains constant throughout this fixed term, the SVR may vary. This fluctuation is frequently due to adjustments in the Bank of England base rate, although the lender retains the discretion to alter the SVR independently.

Pros and cons of a discount mortgage

Pros

• You will pay less than the standard variable rate charged by your lender during the fixed deal period

• You could benefit from interest rate reductions if your lender reduces its standard variable rate

• The early repayment charge applied for switching mortgages mid-deal may be lower than the equivalent for a fixed-rate mortgage deal

Cons

• While the discounted deal period may be fixed, interest rates and repayments can fluctuate as the discount is applied to the lender's standard variable rate

• You may not benefit if your lender reduces its standard variable rate, as it may apply a 'collar', which can limit interest rate reductions

• If your lender increases its standard variable rate your interest rate will also increase making your monthly mortgage repayments higher