By Marie Kemplay
Article 2 of 10
A discount mortgage deal is set below a lender's standard variable rate (SVR), but watch out for the risks involved.
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%.
Just 4% of mortgage customers we surveyed in April 2016 were on a discount deal. These deals typically last between two and five years. When your discount mortgage deal comes to an end, your lender will usually transfer you automatically onto its SVR.
- A discount mortgage is just one of many different types of mortgages, and it's important you get the right sort for you. Which? Mortgage Advisers will look at every available mortgage on the market and recommend the best one for your personal circumstances. You can call for a free initial consultation on 0808 252 7987.
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 that 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 the SVR is – a discount mortgage does not offer much rate stability.
And borrowers with large discounts below their lender's SVR may be in a particularly vulnerable position when their discount mortgage deal comes to an end. This is because they will face large and sudden rate hikes when they're transferred to their lender's SVR.
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 deal period.
- Last updated: October 2016
- Updated by: Dean Sobers