Discount Mortgages Explained

With mortgage rates currently at levels not seen in decades, it’s a stressful time to buy a home or remortgage. If you’re worried that you now can’t afford the mortgage you need, you might consider a discount mortgage.

This will ensure that you pay below the lender’s standard variable rate. However, other mortgage types are available that could be better for you in the long term. We’ll provide more information to help you decide.

What is a discount mortgage, and how does it work?

A discount mortgage is a type of variable-rate mortgage. You’ll sign up for the lender’s standard variable rate (SVR) but will be charged a discount of a set percentage for an agreed period.

For example, if the lender’s SVR is 5% at the start of the mortgage, the discounted rate could be 3.5%. Variable rates can rise or fall, so if the lender’s SVR rises to 6%, your discounted rate could be 4.5%. If the SVR falls to 4.5%, your discounted rate could be 3%.

Each lender has their own SVR and is free to change it at any time – it doesn’t necessarily maintain a relationship to the Bank of England base rate. They can also decide how much of a discount to offer. So, two discount mortgages with different lenders could have different monthly repayment amounts.

How long can you get a discount for?

Usually, the lender will offer a discount on their SVR for two, three, or five years. Some will offer a discount for the entire term of the mortgage (i.e. 25 years for a typical mortgage). This is called a lifetime discount mortgage.

Is a discounted mortgage a good idea right now?

A discounted mortgage might appeal as many lenders currently have an SVR of over 6%. A discount mortgage is a good alternative if you’re considering staying on your lender’s SVR.

Choosing a discount mortgage would lower your rate, at least for the first few years. But there are drawbacks. We’ll summarise both sides of the argument.

Discount mortgages are the right choice for some people but not for everyone. For example, if a discount rate was the best on offer at the time, and you could still easily afford your mortgage repayments if that rate rose by 1-2%, you might be willing to take that risk, knowing it could go even higher. A broker can help you make that decision.

Discounted mortgage vs fixed

An alternative to a discount mortgage is a fixed-rate mortgage. These usually have a higher rate at the start, and that rate will stay the same throughout the mortgage’s introductory period (usually two, three, or five years). Over that period, the discount mortgage rate could change several times. It could stay below the fixed rate or go a lot higher.

So, if you’re choosing between the two, you should ask yourself:

If you’re unsure how to answer these questions, it’s worth speaking to an expert who can give you more information.

How a broker can guide if a discount mortgage is right for you

The brokers we work with have significant experience working with mortgages of all kinds, so they can offer you helpful insight that applies to your situation. They’ll provide:

As well as this practical help, speaking to a broker can give you peace of mind and a sense of security that you’re making the right decision. If you’d like to speak to a broker with working knowledge of these types of mortgages, get in touch.

Lenders that offer discount mortgages

Many lenders offer discount mortgages, including Suffolk Building Society, Clydesdale Bank, and Aldermore. Each lender sets their own SVR and discount level, so comparing the different deals is worth comparing. If you don’t have a lot of time or are not confident that you understand all the variables, it’s best to work with a broker to do this.

Early repayment fees

When you choose a discount mortgage, you’ll decide whether you want that discount to last for two, three, or five years. At the end of that introductory period, you will usually remortgage to avoid paying the lender’s SVR, which is higher. Lenders usually offer a bigger discount the longer you sign up, so the five-year rate will be lower than the two-year rate.

So, if you choose to remortgage earlier than planned, the lender will need to recoup some of the money they’ve lost by giving you a bigger discount. To do this, they charge an early repayment fee.

This could be:

Fixed-rate mortgages also have early repayment fees, and these are often higher than the fees for discount mortgages. Tracker mortgages often don’t have early repayment fees, as the lender doesn’t lose out if you leave early.

Speak to a broker experienced in discount mortgages

Choosing the right type of mortgage can result in savings of hundreds or even thousands of pounds over several years. Choosing the wrong type for you can make it difficult to afford the repayments and, in extreme cases, can even cause you to lose your home.

To save that worry, seek an expert’s opinion before signing a contract. We work with numerous brokers who can give you all the information you need about discount mortgages and can review your financial situation to help you decide if it’s right for you. To arrange a free, no-obligation chat, call us on 0330 818 7026 or enquire online.