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What is a Discount Mortgage

What is a Discount Mortgage?

Fixed, variable and tracker mortgages are pretty self explanatory by their name, but the name 'discount' mortgage leaves a lot to be desired! I know what discount means when I go shopping, but is it the same when I apply for a mortgage? And if it is, do I really want my mortgage discounted and will I miss out on any trimmings by getting said discount?

A discount mortgage is just another, variable rate mortgage; the 'discount' part is that you will receive a discount from your lenders SVR (Standard Variable Rate). So if your lender's SVR is 5% and your discount rate is less 1% you will be paying a 4% interest rate on your mortgage. This is the same ratio if the lender's current SVR increases to 6%, your mortgage interest rate will also increase 1% to 5%.

What determines the lender's SVR, that you will be discounted on, is the lender. It isn't determined on how the Bank of England base rate changes. So if the Bank of England base rate goes up by 1% your lender can choose to:

  • Increase their SVR by the same percentage, a higher percentage such as 1.5% or increase by a lower percentage e.g. 0.5%
  • Neither increase or decrease keeping your repayments the same
  • Decrease the rate - although from previous lending statistics this is the most unlikely of the three options.

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Benefits of a Discount Mortgage

  • Often mortgage fees can be lower on discount mortgages against those on a fixed or tracker.
  • You will always remain under your lender's SVR for the duration on the 'discount' mortgage term.
  • These can initially offer the lowest initial interest rate.
  • Many lenders will allow you to overpay on your monthly repayments by 10% - which may come in handy in low interest rate times.
  • Some lenders will allow you to switch to one of their fixed rate mortgages if interest rates start creeping up too far.

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Sounds like a great deal, doesn't it? But with any great deal there are some draw backs to some people in certain circumstances.

Disadvantages of a Discount Mortgage

  • Your mortgage will be discounted from the lenders SVR but you have no control over your lender's SVR, and therefore no control over your monthly mortgage payments.
    • If you need more security on your monthly outgoings, this may not be the right mortgage for you, regardless of the attractive initial rate.
    • A lender's SVR doesn't have to track the bank of England base rate, leaving you out of pocket if the bank decides to suddenly increase their SVR.
    • Often there will be high fees for those wishing to pay off their mortgage early by remortgaging with another lender 

Mortgage Enquiry

Discount mortgages can be offered at an initial rate for 1-2 years, 3-5 years or in some cases a 'lifetime'. Once the initial rate is up you will automatically switched to your lenders SVR which may be a big hike in your monthly repayments. Set a reminder in your calendar to review your mortgage and the mortgage market at least 3-6 months before you initial rate finishes, allowing you time to shop around for a better deal.

There is not one mortgages which is a 'fix all' solution and making sure you shop around the deal which fits your circumstances the best now and in the future is your best bet for finding the right mortgage for you.

Get an idea of how much you can borrow over a number of years with our mortgage calculator and start your mortgage search today.

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The above post is intended to be informative but does not constitute advice - financial, legal or otherwise. Any opinions given are the author's own and do not necessarily reflect the views of SO Media or the Mitchell Farrar Group.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

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