Dale Mortgage Brokers

Discount variable rate mortgages and advice

A discounted variable rate mortgage provides you with the option of benefiting from a discount on the lender’s standard variable rate for a fixed period.

If the lender’s standard variable rate increases or decreases, so does the discounted rate.

For example, if the lender's standard variable rate (SVR) is 7.5% and they offer a mortgage at a discount of 1.5% for two years, you will start off by paying 6%. If the lender's SVR increases to 9% after six months, you will pay 7.5%. If the SVR decreases to 6.5% after one year, you will pay 5%.

Generally, the shorter the discount period, the larger the discount.

Advantages of a discount variable rate mortgage

• You can make a saving on the lender’s standard variable rate
• If the lender’s standard variable rate falls, you will benefit from a similar fall in interest rate

Drawbacks of a discount variable rate mortgage

• If the lender’s standard variable mortgage rate rises, so does the discounted rate, which can make budgeting more difficult
• The lender may increase their mortgage rates independently to any changes to the Bank of England base rate
• Early repayment charges are likely to apply for at least the term of the discount period
• There is generally an arrangement or booking fee payable for a discount variable rate mortgage
• After the discount period ends, you will normally have to pay the lender’s standard variable rate - so there may be a large increase in your monthly repayments

Stepped discount variable rate mortgage

A stepped discount variable rate mortgage offers you the option of a deal where the discount on the standard variable rate (SVR) starts high and reduces over a period.

For example the rate may start at a 3% discount on the SVR, reducing to a 1% discount after one year. If the SVR is 7.5%, this means that you start off by paying 4.5% and if the SVR is still at 7.5% after one year, you would pay 6.5%.

The low initial rate means that stepped discount rates often appear at the top of ‘best buy’ tables, however they can be more expensive over the term of the discounted period than standard discount deals and an increase in rate may be difficult to budget for.