Discounted Variable Mortgage
A Discounted Variable Mortgage is a variable-rate product where the interest charged is set at a fixed percentage discount off the lender's Standard Variable Rate (SVR) for a defined period.
While they offer the lowest initial rates, they carry a risk: the SVR, and thus your monthly payment, can change at any time for reasons entirely independent of the Bank of England Base Rate.
You need to understand the mechanics of the SVR, the differences between Discount, Tracker, and Fixed rates, and how to evaluate the risks of collars and early repayment charges (ERCs) before committing.
Discounted vs Tracker Mortgages
Discounted variable mortgages differ fundamentally from Tracker Mortgages, even though both are variable rate products. This difference is the single greatest risk you need to understand:
Mortgage Type | Description |
|---|---|
Mortgage Type Discounted Mortgage (Tracks SVR): The rate is set solely by the lender (Standard Variable Rate). The lender can change this rate at their own discretion and for reasons entirely unrelated to the Bank of England's Base Rate. This is the unpredictability factor. | Description Tracker Mortgage (Tracks Base Rate): The rate is tied to an external, public benchmark, which is almost always the Bank of England Base Rate. While the rate can still change, it does so predictably and transparently. |
Our brokers will present the best options available to you, for any type of mortgage, including:
- First-time buyers, home movers and buy-to-lets;
- Employed; self-employed or director mortages;
- Mortgages for non-UK residents or non-UK citizens;
- Bridging loans;
- Bad credit mortgages;
- Guarantor mortgages;
- Joint borrower, sole proprietor mortgages; and
- Absolute, Possessory, Good, or Qualified Title.
Early Repayment Charges (ERCs) and your exit strategy
You can change from a discounted mortgage to another product without penalty once the initial term has finished. The financial challenge arises when you need to change products or sell the property before the discount period ends.
If you exit the product early, most standard mortgages (especially those above 80% Loan-to-Value) will charge an Early Repayment Charge (ERC).
ERCs are common across all mortgage types; the way they are calculated on a discounted mortgage can be different, and potentially more favourable, than on a fixed rate.
How ERCs are calculated
- Fixed Rate ERC: Usually calculated as a percentage of the total outstanding loan amount (e.g., 2% to 6% of the remaining balance). This can result in a massive exit penalty, particularly for long-term fixed products.
- Discounted Mortgage ERC: Often based on a fixed amount of interest or a defined number of months' interest (e.g., 2 or 3 months’ interest). This structure is often less expensive than a fixed-rate percentage calculation, offering a cheaper exit strategy if your circumstances are likely to change.
You must thoroughly check the specific ERC terms of any discounted mortgage, but this potential cost saving is worth bearing in mind if you believe you might need to sell or remortgage before the end of the term.
Pros and cons of Discounted Variable Mortgages
Pros of Discounted Variable Mortgages
- Lowest Entry Rate: Often provides the cheapest initial monthly payment compared to equivalent fixed or tracker mortgages.
- Lower Fees: Frequently carries lower arrangement or setup fees than comparable fixed-rate products.
- Favourable ERCs: Early Repayment Charges (ERCs) are often based on fixed months' interest, potentially making them cheaper to exit than a percentage-based fixed rate ERC.
- Rate Cap Protection: Rare, but valuable deals known as 'Capped Mortgages' prevent your interest rate from rising above a predetermined fixed maximum rate (the cap).
Cons of Discounted Variable Mortgages
- Unpredictable Rate Hikes: The lender can increase its SVR at any time for its own commercial reasons, independent of the Bank of England Base Rate.
- Risk of Payment Shock: If the SVR rises, your payments go up immediately. For a typical £150,000 mortgage, a 1% increase can add an extra £166 per month to your repayments.
- Rate Collar Risk: Many discounted deals include a collar, meaning your interest rate will not drop below a certain fixed level, regardless of how low the SVR goes (limiting your potential savings).
- SVR Reversion: At the end of the discount term, you automatically revert to the much higher, undiscounted SVR, resulting in a sudden, expensive jump in monthly payments.
How to get a Discount Mortgage safely
You can approach any lender or mortgage broker to apply for a discounted product. However, given the unpredictable nature of the SVR and the inherent risk of payment shock, we strongly recommend you consult an independent mortgage broker.
An independent broker is not tied to any particular lender's products. They have access to the whole of the market, which includes thousands of mortgage products, and crucially, they can provide the essential, impartial advice you need:
- They will compare the true cost of a discount mortgage (including fees and ERCs) against the cost certainty of a fixed or tracker rate.
- They can calculate your monthly budget tolerance against a hypothetical SVR rise, helping you avoid payment shock.
- They can often secure special discounted deals, capped deals, or deals with favourable ERC terms not available on the open market.
Book a FREE(i) consultation with one of our independent brokers.
- Access to the whole market.
- Not tied down to selling any particular lender's products.
- 100% impartial advice.
- No need for face-to-face meeting.
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
