What is a mortgage? What is a discount mortgage?
A discount mortgage is a type of variable rate mortgage. The term 'discount' is used because the interest rate is set at a certain 'discount' below the lender's standard variable rate (SVR), for a set period of time.
For example, if a lender has an SVR of 5% and the discount is 1%, the rate you’ll pay will be 4%. And if the SVR is raised to 6%, your discount rate will also rise - in this case to 5%.
Discount mortgage deals typically last between two and five years. When your discount mortgage deal comes to an end, your lender will typically transfer you automatically onto its SVR.
Discount mortgage benefits
Having a discount mortgage means you can be sure that your rate will always remain below your lender's SVR, for the length of the deal.
In certain economic circumstances (for example, when SVRs are generally low as a result of a low base rate) this may mean your discount mortgage deal has a very low rate of interest.
Discount mortgage drawbacks
Because your discount rate tracks your lender's SVR - and you have no control over what that SVR is - a discount mortgage does not offer much rate stability.
And borrowers with large discounts below their lenders' SVR may be in a particularly vulnerable position when their discount mortgage deals come to an end. This is because they will face large and sudden rate hikes when they're transferred onto their lenders' SVRs.
So, if you're on a tight budget and need your repayments to stay the same from month to month, it makes more sense to choose a fixed rate mortgage.
In addition, you may well face early repayment charges if you pull out of a discount mortgage deal before the end of the term.
Need mortgage advice?
We believe you should seek independent mortgage advice before taking out a mortgage. The Which? Group offers an independent mortgage advice service, Which? Mortgage Advisers, that looks at every mortgage from every available lender. You can also find an independent mortgage adviser using the Unbiased.co.uk website.