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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 7, 2021

Discount mortgages are products that can help you save money by locking yourself into an agreement with a reduced interest rate. But how exactly do these products work? How do you go about getting one, and are there any alternatives that you should consider?

In our guide to discount mortgages, you’ll learn the answers to these questions and find out where to turn for specialist advice on them. Plus, in our FAQ section, we reveal the answers to the questions we hear most often from customers who have enquired about discount mortgages.

What is a discount mortgage?

A discount mortgage is a mortgage that comes with a reduced interest rate for either a set period or the entire term. The rate you pay is a discounted one set below the mortgage lender’s standard variable rate (SVR), but it could rise or fall from one month to the next, since discount mortgages are a type of variable-rate product. Some lenders will charge an administration or arrangement fee to set up a discount mortgage.

How do they work?

The discount the lender applies to your mortgage will be a specific percentage that is applied to the interest rate, but the interest rate itself can fluctuate. If you enter any kind of SVR agreement, your lender can adjust your interest rate from one month to the next, and may do so in line with increases or reductions to the Bank of England’s base rate. When this happens, the discount you’re entitled to will still apply but will be deducted from whatever the rate is that month.

Example: If you were to enter a discount mortgage with a discount rate of 1% and an interest rate of 3%, the actual amount of interest you’d pay would be 2%. But if the lender was to increase your rate to 4% the following month, the rate you’d pay would be 3% thanks to the discount.

Most discount mortgages are only discounted for a limited period, usually between two and five years, though a minority of lenders offer them for the full duration of the term. After your discount period ends, you will automatically be moved onto the lender’s SVR, unless you choose to remortgage with your current provider or find another one who offers discount mortgages.

What discount rate can you get?

This varies from lender to lender. Some mortgage providers offer discount mortgages with an interest rate set 1% lower than their SVR, while others stretch to a higher percentage than that. In recent years, the biggest discount on the market was more than 4%, but keep in mind that the product with the highest discount isn’t necessarily the most cost-effective.

For instance, one lender might offer a discount of 4% but their SVR is 6.5%, meaning you’d be paying interest at 2.5%. Another lender might be offering a 2% discount with a SVR of 3.5%, so you’d actually be paying the lower amount of 1.5% interest with lender two.

Also bear in mind that some discount mortgage – around a quarter of these products – come with a collar. This is a set interest rate that your mortgage cannot drop below, regardless of any changes to the lender’s SVR. This will obviously impact the overall amount you pay.

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Should you buy a home with a discount mortgage?

This is a question to put to a mortgage broker as they will be able to fully assess your needs and circumstances and help you make an informed decision about whether a discount mortgage is the way to go. They will likely discuss potential alternatives – such as fixed rate mortgages – with you, and compare the entire market to make sure you end up with the best discount.

To give you a better idea of whether a discount mortgage is the best fit for you, we’ve outlined some of their general advantages and disadvantages below…

Advantages

  1. While in a discount period, you’re guaranteed to be paying lower interest rates than you would if you were on the mortgage lender’s standard variable rate. This takes away some of the uncertainty usually associated with variable rate mortgage products.
  2. Like all variable rate products, discount mortgages can be great during times when UK interest rates are low. With the discount factored in, you might find that this type of mortgage offers some of the best rates on the market during times of low interest.
  3. Fees tend to be lower than for alternative products like fixed rate mortgages.

Disadvantages

  1. They don’t offer the same certainty as a fixed rate mortgage since the actual rate you will pay can fluctuate each month, even with the discount factored in.
  2. You will be automatically switched to the lender’s SVR once the discount period ends, and this is usually higher than the rates for other products, such as fixed rate mortgages.
  3. Deals with a ‘collar’ attached may not offer a rates advantage over other product types.

Which lenders offer discount mortgages?

Lenders currently offering discount mortgages in the UK include Clydesdale Bank, Newcastle Building Society, Yorkshire Bank and Furness Building Society. At the time of writing, discount rates are ranging between just under 1.5% and almost 6%, but this could change at any time. The length of the discount period that these deals include also varies greatly.

Also keep in mind that every mortgage provider has a different eligibility criteria that you must meet. The closer you meet it, the more likely you are to get a good discount mortgage deal.

The discount mortgages market is vast and the lenders we’ve name-dropped here are merely a handful of the companies operating in it. The right lender for you is the one who is best positioned to offer a favourable deal to a customer with your needs and circumstances, and that won’t be easy to find unless you know the market inside out and have access to every lender.

How to find the best deals

The best way to get the most favourable deal on a discount mortgage is to apply through the right mortgage broker. The brokers we work with have access to the entire market and know exactly which mortgage providers to approach for these products and what kind of extra fees they might charge.

Using a broker is a better alternative to going direct to a lender, as it means you will have access to more than just one set of products and won’t miss out if there’s a better deal elsewhere.

Applying through a whole-of-market broker is also a better course of action to doing all of the legwork yourself or doing a quick search on the internet. Online rates tables rarely cover the whole of the market, aren’t bespoke to you and often give prominent placement to sponsored products.

By seeking advice from a broker, you can rest assured that you’ll get the best deal that you qualify for, tailored advice throughout and help with all of the paperwork.

Speak to a discount mortgage broker

We offer a free-broker matching service that can help you find your perfect discount mortgage advisor. Our service takes your needs and circumstances into account before introducing you to a broker whose speciality is discount mortgages, someone who arranges them every day.

Our broker-matching service won’t leave any marks on your credit report, nor will it cost you a penny to use, but it could save you time, money and disappointment in the long haul.

Call 0808 189 2301 or fill out an enquiry form and we’ll set up a free, no-obligation chat with your perfect discount mortgage broker today.

FAQs

What fees do discount mortgages come with?

The additional fees and charges that come with a discount mortgage are really no different to other standard mortgage products. You can read all about them in our guide to mortgage costs and fees, but here are some additional costs that you might not know to look out for…

  • Arrangement fees: An admin fee payable to the lender. They can be as much as £2,000 but can be added to the mortgage if you’d prefer. Just bear in mind that adding it to your mortgage means paying interest on it over a much longer period of time.
  • Early repayment charges: This is a fee you might be liable for if you pay off your mortgage balance early. It’s usually either a set amount, a number of months’ interest or a percentage of the original loan, the outstanding balance or the amount you’ve paid.
  • Exit fee: This is a fee some lenders charge to close off your mortgage when you’re done paying it off. They can range between £50 and £200 and might be payable if you choose to remortgage with a new lender when your discount period ends.

What are discount tracker mortgages?

Discount tracker mortgages are similar products to discount mortgages. The main difference is that they peg their rate to that of the Bank of England, adding a certain percentage to the interest rate. The Bank of England, in turn, pegs its rate to a number of factors related to the UK economy, so when times are tough, the bank’s rates rise, which means you get larger repayments and vice versa when its rates drop.

Example: if the Bank of England’s base rate rises by 0.5%, your rate goes up by the same amount. If it drops by 0.5%, your rate drops by the same amount. With a discount tracker mortgage, the lender adds the discount feature, typically for two to three years.

What happens when my discount period comes to an end?

At this point, your lender will transfer you onto their standard variable rate and that means the amount you’ll be paying each month could be significantly higher. Many customers choose to remortgage before this point, in the hope of finding a new deal with a discount period.

Many customers choose to look for advice at this stage whether to transfer to another product with that lender or even remortgage in the hope of finding a new deal with a discount period.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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