A discounted rate mortgage gives you a reduction off the lender’s standard variable rate for a set period, typically two to five years. For example, if the SVR is 7.5% and you have a 2% discount, you pay 5.5%. The key thing to understand is that your rate is pegged to the SVR, not the base rate — so if the lender raises its SVR, your rate goes up too (minus the discount).
This is different from a tracker mortgage, where rate movements are transparently linked to the Bank of England base rate. With a discounted rate, the lender has discretion over SVR changes, which makes your rate less predictable. The lender could, in theory, raise the SVR without the base rate changing.
Discounted rate deals can offer attractively low starting rates and are sometimes the cheapest option available, particularly for borrowers who need lower initial payments. However, you need to budget for the possibility of rate increases. Some discounted rate products also have a collar, meaning the rate cannot fall below a certain level even if the SVR drops significantly.
Your lender’s SVR is 7.0% and you take a two-year discounted rate at SVR minus 2.0%, giving you an initial rate of 5.0%. If the lender raises its SVR to 7.5%, your rate becomes 5.5%. If the SVR drops to 6.5%, your rate falls to 4.5%. On a £200,000 mortgage, each 0.5% change shifts your monthly payment by roughly £58.
Key Points
- Your rate is a set discount off the lender’s SVR, not linked to the base rate
- The SVR can change at the lender’s discretion, making your rate less predictable than a tracker
- Discount periods typically last two to five years
- Can offer attractively low starting rates compared to other products
- Some deals have a collar that sets a minimum rate even if the SVR drops