Discounted variable mortgage explained
What is a discount variable mortgage?
A discount variable mortgage is a common mortgage type offered by UK mortgage lenders.
All lenders have what is known as their Standard Variable Rate (SVR), the default rate of interest charged by the lender when the borrower is not on an initial fixed, tracker or discounted rate.
The discounted variable mortgage rate is a margin of interest below the SVR rate; it offers a mortgage rate at an incentivised level for a period of time, generally 2 – 5 years.
Discount vs Bank of England base rate tracker mortgages
A Bank of England Base Rate tracker mortgage will follow movements in the Bank of England base rate.
A Discount Variable Mortgage will follow movements in the mortgage lender’s SVR. This means the rate could move even when the Bank of England base rate does not. See our futher thoughts on how we have seen these changes implimented.
Generally, a Bank of England base rate is preferable to a discount variable rate, as you have greater clarity on market movements. However, there are other factors to consider.
Many Building societies offer discount variable mortgages over Bank of England base rate trackers, this mortgage type offers them greater flexibility, and they can lend at a lower interest rate as a result.
Difference between discounted and fixed rate mortgage
A fixed rate mortgage will not move for the duration the rate is fixed. This could be 2, 3, 5, 10 years or longer. This can be good if you need certainty over your monthly outgoings. It may not be as attractive if you require no or low early repayment charges, which fixed rates usually have.
A Discount Variable Mortgage will follow movements in the mortgage lender’s SVR and so does not offer certainty of monthly payments.
If you need flexibility in repaying your mortgage without early repayment charges or lower charges, then a discount variable rate may be a better choice.
You may also obtain a lower rate with a discounted variable rate over a fixed rate mortgage.
How often does a lender's Standard Variable Rate (SVR) change?
Generally, lenders move their SVR in accordance with market changes in the cost of funds. A change is typically linked to a Bank of England base rate move; however, there is no guarantee this will be the case.
It may be the case that the lender will also raise or lower its rates by a larger or lesser percentage than the Bank of England, and they may do this more or less frequently. It is up to the lender, which is one of the primary considerations when assessing a discounted mortgage rate.
Pros & cons of a discount variable mortgage
Pros
Cons
- Sometimes you may have access to lower interest rates with a Discount Variable Mortgage
- Usually have no early repayment charges
- Can offer additional flexible features, such as an offset account
- The mortgage interest rate can increase unexpectedly when a lender increases their SVR
- No certainty of monthly payment
Do discount variable mortgages have early repayment charges?
Discount Variable Mortgages can have early repayment charges; however, it is more common than, say, fixed rates for these mortgages not to have any early repayment charges.
As the lender is lending against their own internal SVR rate, there will be no external fixed rate SWAP contract for the lender to break if the mortgage is fully repaid.
Best SVR mortgages
For example, if you are considering a Santander SVR mortgage rate, the lender might have a higher SVR rate than a Halifax SVR mortgage rate.
However, the comparison is flawed as it doesn’t matter what the standard variable rate is when considering a discounted variable mortgage. It depends on the level of discount the lender will offer you.
The discount will determine the interest rate charged.
Author: Edward Checkley
Managing Director
