What Is a Discount Rate Mortgage?
A discount rate mortgage is a type of variable rate product where the interest you pay is set at a fixed percentage below your lender's SVR for an agreed period. For example, if the lender's SVR is 7.50% and your discount is 2.00%, you would pay 5.50%.
It is important to understand how discount rate mortgages differ from other variable rate products:
- Linked to the SVR, not the base rate — Unlike a tracker mortgage, which follows the Bank of England base rate with a fixed margin, a discount rate follows the lender's SVR. The SVR is set by the lender and can change at their discretion, meaning your rate can move independently of the base rate.
- The discount is fixed, the rate is not — While the percentage discount below the SVR remains constant during your deal period, the SVR itself can change at any time. If the lender increases their SVR, your rate goes up too, even if the base rate has not changed.
- Introductory period — Discount deals typically run for two, three, or five years. Once the discount period ends, you revert to the full SVR, which is almost always significantly higher.
- No guaranteed floor — In theory, if the SVR falls very low, your discounted rate could become extremely competitive. However, in practice, lenders are unlikely to reduce their SVR to very low levels, and some discount deals include a collar preventing the rate from falling below a certain point.
Discount rate mortgages were historically very popular in the UK market but have become less common in recent years as tracker and fixed rate products have grown in prominence. However, they can still represent good value in certain circumstances, particularly when lenders offer steep discounts to attract new business.
Discount Rate vs Tracker vs Fixed: Key Differences
Understanding how discount rate mortgages compare to the other main product types is crucial when deciding whether to remortgage to or from a discount deal.
Discount rate vs tracker mortgage
Both are variable rate products, but the key difference lies in what they are linked to. A tracker follows the Bank of England base rate with complete transparency: you know exactly how your rate will change when the base rate moves. A discount rate follows the lender's SVR, which the lender can adjust at their own discretion. This means a lender could increase their SVR even if the base rate has not changed, or they could choose not to pass on a base rate cut in full. Trackers therefore offer greater predictability than discount rates.
Discount rate vs fixed rate mortgage
A fixed rate mortgage locks in your interest rate for the deal period, giving you absolute certainty about your monthly payments. A discount rate can change at any time if the lender adjusts their SVR. Fixed rates offer stability and are easier to budget around, while discount rates offer the potential for lower payments if the SVR stays low or falls, but carry the risk of increases.
Pros and cons of each approach
- Discount rate pros — Potentially lower initial rates, benefit from SVR decreases, often lower arrangement fees.
- Discount rate cons — Uncertainty about future rate changes, lender controls the SVR, less transparency than trackers.
- Tracker pros — Transparent link to base rate, benefit from base rate cuts, clear and predictable.
- Tracker cons — Exposed to base rate increases, no payment certainty.
- Fixed rate pros — Complete payment certainty, easy to budget, protected from rate rises.
- Fixed rate cons — Typically higher rates than initial variable deals, no benefit from rate cuts, often higher ERCs.
The best choice depends on your attitude to risk, your need for certainty, and your view of where interest rates are heading. Many borrowers prefer the security of a fixed rate, while those comfortable with variability may find discount or tracker deals offer better short-term value.
When to Remortgage a Discount Rate Mortgage
If you are currently on a discount rate mortgage, there are several situations where remortgaging could improve your financial position.
Your discount period is ending
The most common trigger for remortgaging is when your discount period is about to expire. Once it ends, you will move to the full SVR, which can be considerably more expensive. Starting to explore your options around six months before your discount period ends gives you time to secure a competitive new deal without any gap where you are paying the higher SVR rate.
Your lender has increased their SVR
If your lender has raised their SVR, your discounted rate will have increased too. If the new rate is no longer competitive compared to what is available elsewhere, remortgaging could bring your costs back down. Remember to factor in any early repayment charges when calculating whether switching makes financial sense.
You want more certainty
If the variability of your discount rate is causing uncertainty in your budgeting, switching to a fixed rate deal can provide the predictability you need. This is particularly relevant if interest rates are rising or expected to rise, as locking in a fixed rate protects you from further increases.
Better deals have become available
The mortgage market is constantly evolving, and new products are launched regularly. If significantly better deals have come to market since you took out your discount rate, it may be worth switching even if your discount period has not yet ended, provided the savings outweigh any ERCs.
Your circumstances have changed
Changes in your income, credit profile, or the value of your property could mean you now qualify for better rates than when you originally took out your discount deal. An improved LTV ratio in particular can unlock access to more competitive products across all rate types.
