UK Consumer Finance: Discount Mortgages and why the banks want to promote them

In recent weeks there has been a big push by lenders in the UK on their "Discount Mortgages". HSBC have introduced a market beating Discount Mortgage product that tops the best buy charts with an interest rate of 1.99%. The Daily Express said last month that HSBC were starting a "mortgage war". God forbid that the Daily Express should be melodramatic. Truth is it didn’t start a mortgage war as they so calmly predicted, instead very little has happened in any other category of mortgage.

For example, short term fixed rate mortgage charts have remained virtually unchanged since the beginning of August. Tracker Mortgage best buy charts have also not changed much in the same time period. The truth is that it is all in the name. Discount Mortgages unlike Fixed Rate Mortgages and Tracker Mortgages are ultimately determined by the institutions themselves.

So why have the financial institutions been so keen to promote the Discount Mortgage above all others. The discount referred to in the title is based against their own Standard Variable Rate (SVR) which they can raise or drop as they see fit. This lets them reduce the risk of any base rate movements and they do not have to pay such a premium in the money markets to secure funds.

Even before the financial crisis began in late 2007, many financial institutions had begun to base mortgage products on their SVR. In fact in one rather heavy weight report on the mortgage market by a leading financial research company published in early 2008 they highlighted that mortgages were beginning to move away from the Bank of England Base Rate.

So yes it is possible to get a Discount Mortgage at 1.99% but it is impossible to guarantee that it will stay at that level.

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Consumer Finance in the UK