Last reviewed: June 2026
TL;DR- A discount mortgage sets the pay rate at a fixed percentage below the lender's standard variable rate (SVR).
- Because SVR is set by the lender and can change at any time, the pay rate on a discount mortgage is not fully predictable.
- Discount deals are often available with no early repayment charge, providing flexibility to remortgage.
- The key risk versus a tracker is that the lender can raise SVR independently of the Bank of England base rate.
How a Discount Mortgage Works
A discount mortgage sets the borrower's pay rate as a fixed discount to the lender's standard variable rate (SVR). If the lender's SVR is 7.5% and the discount is 2.5%, the pay rate is 5%. If the SVR changes - either up or down - the pay rate changes by the same amount, maintaining the same discount margin throughout the deal period.
The discount is fixed for the deal period, which is typically 2 or 3 years for introductory discount products, after which the mortgage reverts to SVR. Some lenders offer longer or lifetime discount arrangements.
SVR Dependency: The Core Risk
The fundamental risk of a discount mortgage is that the lender's SVR - the reference rate from which the discount is calculated - is set at the lender's discretion and can be changed at any time. Unlike a tracker mortgage, where the reference rate is the Bank of England base rate (an external, transparent benchmark), SVR movements are internal decisions.
A lender can raise its SVR without a corresponding base rate increase, or can raise it by more than a base rate increase. Conversely, when the base rate falls, lenders may reduce SVR by a smaller amount, meaning discount mortgage borrowers benefit less from base rate cuts than tracker borrowers. Borrowers should review the lender's historical SVR management relative to base rate movements before choosing a discount product.
Discount vs Tracker: Key Differences
Both discount and tracker mortgages are variable rate products with deal periods, but they differ in how the pay rate is determined:
- Tracker: pay rate = Bank of England base rate + fixed margin. Movements are automatic, transparent and directly linked to an external published rate.
- Discount: pay rate = lender SVR minus fixed discount. Movements depend on SVR changes, which are at the lender's discretion.
In practice, SVRs and base rate trackers often move in similar directions, but the magnitude and timing can differ. Discount mortgages may suit borrowers who are comfortable with their chosen lender's SVR management approach and value the flexibility that typically comes with no ERC.
Early Repayment Charges on Discount Deals
Many discount mortgage deals carry no early repayment charge during the deal period, which is a significant advantage for borrowers who may want to switch products if rates change or if their circumstances require them to remortgage. Some discount deals do carry ERCs - product terms should be checked carefully. Where no ERC applies, borrowers can move to a fixed rate deal without penalty if base rates begin to rise.
Affordability Assessment
FCA rules require lenders to assess affordability on a stressed basis for variable rate mortgages. The stress test uses a rate above the initial pay rate to assess whether the borrower could manage higher payments. For discount products, lenders must consider the possibility that SVR rises and that the pay rate increases accordingly during or after the deal period.
Frequently Asked Questions
Can the lender change the discount margin during the deal period?
No. The discount margin is fixed for the deal period. What can change is the SVR from which the discount is calculated. If the SVR moves, the pay rate moves by the same amount. The discount margin itself remains constant until the deal period ends.
What happens when the discount deal period ends?
At the end of the discount period, the mortgage reverts to the full SVR - the discount is removed. This typically means a significant payment increase. Borrowers should begin reviewing remortgage options several months before the deal end date to avoid a period on full SVR.
Is a discount mortgage suitable for borrowers who plan to sell soon?
If the discount deal carries no early repayment charge, it may suit borrowers who plan to sell within the deal period, as they can redeem the mortgage without penalty. If an ERC applies, the cost of early redemption should be factored into any decision to sell during the deal period.
How do I find out the lender's SVR management history?
Historical SVR data is not always readily available, but the FCA publishes product sales data and some industry bodies track average SVRs across lenders. A whole-of-market mortgage broker can advise on which lenders have a history of SVR movements closely aligned with base rate changes and which have diverged.
