What is a Discount Rate Mortgage?
A discount rate mortgage offers an interest rate set at a fixed percentage below your lender's Standard Variable Rate (SVR). For example, if the SVR is 6.5% and your discount is 1%, you'd pay 5.5%. Unlike tracker mortgages which follow the Bank of England base rate, discount mortgages follow your specific lender's SVR - which can change at the lender's discretion.
Discount mortgages typically last 2-5 years, after which you'd move onto the full SVR unless you remortgage to a new deal. They can offer attractive initial rates, but the variable nature means your payments can change during the discount period.
Discount vs Tracker vs Fixed
The key difference between discount and tracker mortgages is what they're linked to. Trackers follow the Bank of England base rate transparently, while discounts follow the lender's SVR which they can change independently. This means discount rates can move even if the base rate stays the same, if the lender chooses to adjust their SVR.
Compared to fixed rates, discount mortgages offer potential for payment reductions if rates fall, but carry the risk of increases. Fixed rates provide certainty but you won't benefit from any rate decreases. Discount rates often come with lower or no early repayment charges, offering more flexibility than fixes.
Are Discount Mortgages Worth Considering?
Discount mortgages have become less common as trackers and fixed rates have dominated the market. Their main appeal is flexibility - often with lower early repayment charges than fixed rates. They might suit you if you want some rate variation potential but don't want the full exposure of a tracker.
However, the lack of transparency compared to trackers is a drawback. Your lender could increase their SVR without any base rate change, raising your payments unexpectedly. For most borrowers, the certainty of a fix or the transparency of a tracker is preferable to a discount rate.