Borrowing and credit
What is a discount mortgage?
Quick definition: A discount mortgage charges a variable rate set below another lender rate, usually the lender's standard variable rate, for a limited period.
At a glance
- The rate is discounted from another rate.
- Payments can still change because the underlying rate can change.
- The discount period is usually temporary.
- It is different from a fixed-rate mortgage.
Explain it simply
A discount mortgage gives a reduction from another rate, often the lender's standard variable rate. For example, the lender might offer a rate that is 1 percentage point below its standard variable rate for two years. This does not make the payment fixed. If the lender changes the underlying rate, the discounted rate can change too. The borrower should check what happens when the discount ends.
Student explanation
Discount mortgages are variable-rate products. The interest rate is calculated by taking a discount from a specified lender rate for an agreed period. The borrower benefits from the discount, but not from full payment certainty because the underlying rate can move. Students should compare a discount mortgage with a tracker mortgage: both are variable, but a discount is linked to a lender rate while a tracker is linked to a reference rate such as Bank Rate.
Professional explanation
A discount mortgage is a variable-rate product where customer pricing is set at a contractual discount to a specified lender rate, commonly the standard variable rate. Product risk depends on the volatility and governance of the underlying rate, the size and duration of the discount, reversion arrangements, fees and early repayment charges. Disclosure should make clear that the customer payment can change during the discount period. Discount products can be attractive on headline rate but require careful comparison with trackers, fixed rates and total cost over the expected holding period.
UK example
A borrower takes a two-year discount mortgage priced at 1 percent below the lender's SVR, knowing payments could change if the SVR changes.
Why it matters
Discount mortgages can look cheap at first, but borrowers need to understand the variable underlying rate.
Common misunderstanding
A discount mortgage is not fixed just because the discount itself is fixed for a period.