What Is a Discounted Mortgage? Pros, Risks, and When to Consider One

Discounted mortgages offer a variable interest rate below the lender’s Standard Variable Rate for a set period. This makes them an attractive option for homeowners looking to reduce their monthly payments early on.

As with any financial product, discounted mortgages carry both benefits and potential risks. Understanding how these deals work is vital to deciding if they’re right for you.

In this guide, we highlight all you need to know about discounted mortgages: core features, pros and cons, ideal borrower profile, and how to find the best discounted mortgage rate on the market.

What is a Discounted Mortgage?

A discounted mortgage is a variable rate home loan where the interest rate is set below your lender’s Standard Variable Rate (SVR) for a fixed period.

The Standard Variable Rate (SVR) is the variable rate your lender applies at a given time. It is typically based on factors such as:

• The cost of borrowing
• The Bank of England base rate
• The lender’s risk and lending policies
• Competition in the market
• Wider economic influences

The “discount” is an agreed percentage of the SVR. For example, if the SVR is 7% and the discount is 1%, then your initial interest rate is 6%. This rate fluctuates in line with changes to the lender’s SVR, but the discount of 1% remains unchanged for a set period.

A discounted variable mortgage is just another term used for a discounted mortgage, reflecting that it’s a variable-rate loan.

How do Discount Mortgages Work?

Here’s a breakdown of how discounted mortgage deals work:

• Your monthly repayments are calculated based on the lender’s SVR minus the fixed discount. If the SVR moves (up or down), your mortgage rate and payments change.
• Discounted mortgages are commonly available with an introductory term of 2, 3, or 5 years. For example, a 2-year discounted mortgage offers a discounted rate for the first two years of a 20-year mortgage.
• After the discount period, the rate usually reverts to the full SVR. Alternatively, you may be able to remortgage to a new deal.
• What is a lifetime discounted mortgage? There are niche products where the discount is offered for the entire duration of the loan (sometimes over 10 years). Lifetime discounts may include a “collar,” meaning the rate won’t drop below a certain level even if the SVR does.

Benefits of Discounted Mortgages

Discount mortgage deals have several advantages that attract borrowers:

• Lower interest rate: The discount from SVR means your initial interest rate may be more competitive than fixed or tracker deals at that time.
• Savings potential: You benefit from lower monthly payments if your lender’s SVR drops during your discount term.
• Broad availability: Discounted mortgages are often available to a wide range of borrowers, including first-time buyers and remortgagers.
• Flexibility: Some deals offer the flexibility to remortgage with your current lender or a new funder once the discount period ends.

Risks and Drawbacks of Discounted Mortgages

Despite their appeal, these deals might not work for everyone:

• Rising monthly mortgage payments: If your lender’s SVR rises (often influenced by economic factors including the BoE’s base rate), your monthly mortgage repayments increase. This can strain tight budgets.
• Less predictable than a fixed rate: Unlike fixed rates, you can’t predict exactly what you’ll pay each month, making budgeting more difficult.
• Early repayment fees: Many discounted mortgages include early repayment charges during the discount period. Switching products or paying off your mortgage early may incur significant costs.
• Potential for higher rates: Even lifetime discounted mortgages might cost more than the best fixed-rate mortgage deals over time.
• Fees and deposits: Some discounted deals have higher arrangement fees or deposit requirements than other mortgage types.

Who Are Discounted Mortgages Best Suited For?

In general, discount mortgage rates work well for borrowers who expect stable or falling interest rates and those with income to handle potential rate fluctuations.

However, if you need predictable payments, a discounted mortgage might not be the best fit, as its variable nature can make budgeting trickier.

Discounted vs. Tracker Mortgages

What’s the difference between discounted and tracker mortgages?

While both are variable-rate mortgages, they work differently:

• Tracker mortgages follow the Bank of England base rate (or a lender’s base rate) plus a set margin.
• Discount mortgages track the lender’s SVR, offering a discount from this rate.

Here’s a quick look at how they compare:

How to Find the Best Discount Mortgage Rates

To get the best deal on a discounted mortgage, don’t limit yourself to your current lender. Comparing offers from across the market is the smart move.

Pay close attention to these factors:

• The size of the discount and what SVR it’s linked to.
• The length of the discount term.
• All fees and charges. Ask about arrangement fees and early repayment charges.
• The flexibility of the product, e.g., the ability to make overpayments or port your mortgage to a new property.

Researching and comparing the numerous discount mortgage deals takes time and can get complicated. An independent mortgage broker like Flagstone helps you cut through the complexity and narrow your search to the best deals.

With relationships across the entire market and our finger firmly on the pulse, we have access to an extensive range of deals, including exclusive rates. Our goal is always to find the best mortgage for our clients’ specific needs.

Speak to a Mortgage Advisor About Discounted Mortgages

A discounted mortgage can be a good choice for some, but carries more risk of payment fluctuations than a fixed rate.

When making a major borrowing decision that affects your household budget for the next several years, you want professional, personalised guidance that considers the best solution for your unique circumstances.

Contact the Flagstone team today for a friendly, no-strings consultation about your borrowing options, including top discounted mortgages.