Discount rate

Discounted rate mortgages tend to be set a couple of percentage points below the lender’s standard variable rate (SVR). The discount tends to last for two years; the rate then reverts to SVR unless you remortgage to another deal.

In theory, with a discount mortgage you benefit from cuts in the base rate because your rate is linked to the lender’s SVR, which usually reflects movement in base rate. But it is not guaranteed to do so. The SVR is set at the lender’s discretion: we have seen recently that the lender does not have to pass on any base rate reduction and may choose not to.

The other downside of a discount rate mortgage is that you pay more if base rate rises. The lender may also choose to increase its SVR by more than the hike in base rate, pushing your mortgage payment up higher. If you need the certainty of knowing what your monthly mortgage payments will be, you should perhaps consider a fixed rate instead.