How do discount rate mortgages work?
A discount rate mortgage charges you the lender’s SVR minus a set percentage for an agreed period. If the SVR is 7.5% and your discount is 2.5%, you pay 5% while the discount lasts. The discount is fixed, but it applies to the SVR, and the SVR can change, so your actual rate is still variable.
Discount periods usually run two to five years. When yours ends, you revert to the full SVR. As with any introductory deal, plan to remortgage before the discount period is up, so you never sit on the pricier SVR.
Discount rate vs tracker rate
Discount rates and tracker rates are both variable, but they follow different benchmarks. A tracker moves with the Bank of England base rate, which is set in public and easy to follow. A discount moves with the lender’s SVR, which the lender can change whenever it chooses.
So a tracker shows you clearly why your rate has moved, while a discount rate leans on your lender’s commercial calls. SVRs do tend to track the base rate over time, though not always in full and not always straight away.
Advantages of discount rate mortgages
A discount rate mortgage often starts lower than an equivalent fixed rate product, which can trim your monthly payments in the short term. Many also carry lower early repayment charges, or none at all, so you keep the freedom to overpay, switch, or sell your home without a penalty.
If you are comfortable that you can absorb some movement in your payments and you value that flexibility, a discount rate can be a good fit. It suits you especially well if you expect to move home or remortgage within the discount period.
Risks to be aware of
The main risk is that your lender raises its SVR and pushes your payments up, even if the Bank of England base rate has not moved. It does not happen often, but the lender is within its rights to do it. Budget on the basis that your payments could rise.
Discount rates can also look cheaper than they really are when the SVR happens to be low at the time you sign up. Before you commit, check the SVR itself and look at how often that lender has changed it in the past.
Is a discount rate mortgage right for you?
A discount rate mortgage may suit you if you want lower payments at the start than a fixed rate would give, you value the flexibility of low or no early repayment charges, and you can live with the chance of your rate changing. It is a poorer fit if money is tight and you need to know your payment will stay exactly the same.
At Clearview Mortgage Solutions, we compare discount, fixed and tracker rates across the whole market to find the right match for you. Get in touch for a free, no-obligation consultation.