Discount Mortgages Explained

What Is a Discount Mortgage?

A discount mortgage gives you a reduced interest rate for an introductory period, typically two to five years. The discount is applied to your lender's standard variable rate (SVR). For example, if the SVR is 7% and your discount is 2%, you'd pay 5%.

Unlike a tracker mortgage, which follows the Bank of England base rate, a discount mortgage is linked to the lender's SVR. This is an important distinction because lenders can change their SVR at any time and by any amount, not necessarily in line with base rate movements.

Once the discount period ends, you'll revert to the full SVR. As with other introductory deals, most borrowers choose to remortgage to a new product before this happens to avoid paying a higher rate.

How Does a Discount Mortgage Compare to a Tracker?

Both discount mortgages and trackers are variable rate products, but they track different benchmarks. A tracker follows the Bank of England base rate with a fixed margin, offering complete transparency. A discount mortgage follows the lender's SVR, which the lender can adjust at their discretion.

This means a discount mortgage is less predictable than a tracker. Your lender could increase the SVR by more than any base rate rise, or they could increase it even when the base rate hasn't changed. In practice, most lenders move their SVR roughly in line with the base rate, but there's no guarantee.

The trade-off is that discount mortgages sometimes offer lower starting rates than equivalent tracker deals. If you're comfortable with the additional uncertainty, a discount mortgage could save you money in the short term.

Advantages of Discount Mortgages

Discount mortgages can offer attractive initial rates, sometimes lower than both fixed and tracker deals. This can make them appealing if you're looking to minimise your monthly payments in the short term.

If your lender reduces their SVR, perhaps in response to a base rate cut, your payments will fall automatically. You don't need to remortgage or take any action to benefit from the reduction.

Some discount mortgages come with no early repayment charges or lower ERCs than fixed rate deals. This additional flexibility can be valuable if you're planning to move house or remortgage within the discount period.

Disadvantages and Risks

The main risk is the lack of transparency. Because your rate is linked to the lender's SVR rather than an independent benchmark, you're relying on the lender not to increase the SVR disproportionately. While this rarely happens in practice, it remains a possibility.

Your payments can go up as well as down, making budgeting more difficult than with a fixed rate. If interest rates rise significantly during your discount period, the savings from the initial discount could be wiped out by higher payments.

Some discount mortgages include early repayment charges and tie-in periods that extend beyond the discount period itself. Always check the terms carefully to avoid being locked into the full SVR with penalties for leaving.