Stepped Rate Mortgages

What are Stepped rate mortgages?

Stepped rate mortgages were created as a way of lenders providing a mortgage product that might meet their prospective customers' needs. Although there are many different kinds of stepped rate mortgages, they actually all have the same features. The main feature is that there is one particular deal for a period of time, then another deal for a further period, and so on until the borrower will end up on the standard variable rate.

Stepped rate mortgages come in various forms. One of these could be a series of discounts over a number of years, with the discount reducing during the period of the scheme. Or a series of short term fixed rates followed by a period of discount. There are also some stepped schemes that offer cash back in order to help with moving costs.

With the onset of tracker mortgages, they have been combined with stepped rate mortgages to create stepped trackers, where the mortgage tracks the base rate at a certain amount over it, with the difference between the base rate and the pay rate increasing with each step. In general, a stepped rate mortgage features a great deal to start with but with gradually increasing repayments.

So, who would stepped rate mortgages be good for? Ideally it would be for a first time buyer, or for someone who needs to have payments as cheap as possible at first, but does not need this to be the case for the long term.

For someone who has bought a house but is worried about their ability to make the initial repayments in addition to the cost of buying furnishings and all the extra costs associated with buying a house. This is beneficial because a stepped rate mortgage with an initially large discount, followed by a smaller discount and then a smaller one as the borrowers income grows and they don't need the discount so much.

Perhaps someone who needs to budget carefully in their first year, and would like a fixed rate for a while, followed by a discount as they still want their mortgage costs to be quite low. There are stepped mortgages which do this. They can be tailored sometimes to suit your exact needs, so are worth looking at.

Something you should be very careful about is tying yourself into a stepped rate mortgage which will charge you redemption penalties should you try and remortgage away from them as the discounts get smaller and the pay rate gets higher and higher. In general, you pay for the first period of discount by staying with the mortgage during the next periods. There may even be overhanging redemption penalties which stop you moving mortgage once you are on the standard variable rate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2009

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