Discount mortgages offer a rate below the lender's standard variable rate for a period, which can mean lower payments, but with less predictability than a tracker. This guide explains discount rate mortgages: how they work, their pros and cons, how they compare with trackers, and who they suit.
What a discount mortgage is
A discount mortgage has an interest rate set at a fixed amount below the lender's standard variable rate for a period, such as two years. For example, if the lender's standard variable rate is 7% and the discount is 2%, you pay 5%. Because the rate is linked to the lender's standard variable rate, it moves whenever the lender changes that rate, rather than following the base rate directly.
How it works
The discount, the gap below the standard variable rate, stays the same for the deal, but the standard variable rate itself can change at the lender's discretion, as our guide to the standard variable rate explains. So if the lender raises its standard variable rate, your discounted rate rises by the same amount, and if it lowers it, your rate falls. Your payments therefore depend on the lender's decisions about its standard variable rate.
The advantages
A discount mortgage offers a rate below the lender's standard variable rate, so lower payments than reverting to that rate, and it can fall if the lender reduces its standard variable rate. Discount deals sometimes have lower initial rates than equivalent fixes. For those wanting lower payments for a period and comfortable with some variability, a discount can be an option worth considering alongside trackers and fixes.
The disadvantages
The key drawback is unpredictability. Unlike a tracker tied to the transparent base rate, a discount follows the lender's standard variable rate, which the lender sets at its discretion and may not move in step with the base rate, as our guide to trackers explains. So your rate could rise even if the base rate does not, making a discount less predictable than a tracker.
Discount versus tracker
Both discounts and trackers are variable, but they differ in what they follow. A tracker follows the Bank of England base rate plus a margin, which is transparent and outside the lender's control. A discount follows the lender's own standard variable rate, which the lender controls. This makes trackers more predictable, while discounts depend on the lender's behaviour, which is the main consideration when choosing between them, as our guide to fixed versus variable explains.
Watch the standard variable rate
Because a discount is only as good as the standard variable rate it is based on, it is worth checking the lender's standard variable rate and how it has behaved. A large discount off a high standard variable rate may still leave you paying more than a tracker or fix. Looking at the actual rate you would pay, not just the size of the discount, is the sensible way to compare a discount deal.
Who a discount suits
A discount mortgage may suit those wanting lower payments for a period, who are comfortable with a rate that can change at the lender's discretion, and who have looked at the actual rate rather than just the discount. Those needing certainty may prefer a fix, and those wanting transparency may prefer a tracker. As always, comparing the real cost of each option helps you choose what fits your needs.
An example of a discount
Suppose a lender's standard variable rate is 7% and you take a discount deal of 2% off for two years. You would pay 5%. If the lender later raised its standard variable rate to 7.5%, your rate would become 5.5%; if it cut it to 6.5%, your rate would fall to 4.5%. This shows how your payments rise and fall with the lender's standard variable rate, plus the fixed discount.
Stepped discounts
Some discount deals are stepped, offering a larger discount in the first year and a smaller one later, which lowers initial payments but raises them partway through the deal. It is important to understand how a stepped discount changes over time, so you are not caught out by a rise. Checking the structure of a discount deal, not just the headline figure, helps you plan for the payments throughout.
Fees and early repayment charges
Discount deals can carry arrangement fees and early repayment charges during the discount period, as our guide to early repayment charges and how to avoid them explains. So leaving early may incur a charge, and fees affect the overall cost. Factoring these in when comparing a discount against trackers and fixes gives a fairer picture of the true cost and flexibility of the deal.
Discounts and budgeting
Because a discount follows the lender's standard variable rate, which can change at the lender's discretion, your payments are less predictable than a fixed rate. This makes budgeting harder, since your rate could rise even without a base rate change. If certainty matters to you, this unpredictability is a drawback of discounts compared with fixes, and worth weighing against the lower initial payments they can offer.
Comparing the real rate
The key when assessing a discount is to look at the actual rate you would pay, not just the size of the discount. A 2% discount off a 7% standard variable rate gives 5%, but a larger discount off a higher standard variable rate might be no better. Comparing the real rate, and how it might change, against trackers and fixes is the sensible way to judge a discount deal.
Discounts and the wider market
Discount deals are less common than fixes and trackers, but they appear when lenders want to offer a competitive initial rate. Whether a discount is the best choice depends on comparing its real rate, and how it might change, against the fixes and trackers available at the time, as our guide to fixed versus variable rates explains. A discount is worth considering only if it genuinely beats the alternatives for your needs.
When a discount works well
A discount can work well for someone wanting lower initial payments, who is comfortable with some variability and has checked the real rate and any stepped structure. It can be a way to keep early costs down, particularly if the lender's standard variable rate is expected to stay low or fall. But for those needing certainty, a fix is usually safer, and for transparency, a tracker is clearer.
In short, a discount can offer lower initial payments, but its reliance on the lender's standard variable rate makes it less predictable than a tracker and less certain than a fix, so judge it on the real rate you would pay and how comfortable you are with that rate potentially changing at the lender's discretion.
In short
A discount mortgage charges a set amount below the lender's standard variable rate for a period, so your payments depend on that rate, which the lender controls. It offers lower payments than the standard variable rate and can fall if the lender cuts it, but it is less predictable than a tracker, which follows the transparent base rate. Check the actual rate you would pay, not just the size of the discount.
Where to get help and next steps
Read our guides to the standard variable rate, tracker mortgages, and fixed versus variable. This is general information, not mortgage or financial advice.