Are stepped rate mortgages right for you?
Stepped rate mortgages
If you need to take out a mortgage in order to by a property, then you will know that there are several options that are available to you. You might choose to pick a tracker mortgage, or a fixed rate mortgage, both of which have advantages and disadvantages. However, you might also consider selecting a stepped rate mortgage. This combines some of the features of both the tracker and the fixed rate mortgage, offering borrowers the best of both worlds when they take out a mortgage with the provider. There are several reasons why stepped mortgages could be right for you
What does a stepped rate mortgage do?
If you have never heard of a stepped rate mortgage before, then you may not know why so many people favour it. The stepped rate mortgage is shaped rather like a tracker mortgage, following the line of inflation at a set level. However, unlike the tracker mortgage, the stepped rate method gradually increases the amount of interest being charged on your mortgage, so that as your payments on the premium reduce that amount, so the interest level increases to keep the repayments at a similar level. This helps you to keep a stable repayment rate, perfect if you are renting out the property and paying the mortgage from the rents, but also if you run any kind of business where you need to account regularly for mortgage payments. Working out how much these have cost during the year is much easier when the rates are the same.
Stepped up or stepped down?
Step up or step down mortgages
If you choose to have a stepped mortgage, then you will need to make a primary choice between a mortgage interest rate level that increases as the years pass, or a level that decreases for each year of payment. This part of the mortgage takes place during the early years of the loan, and then you move on to paying whatever is the standard rate. it is probably a good idea to choose the step-up rate as your base, since you will start with a larger mortgage, paying the least amount of interest. With the step up, you pay the most amount of interest and then less as the years pass. Since the period of the step rate is only about 5 years, it is not enough to allow you to reduce your mortgage premiums, but the beginning can be a good time to start eating away at the main body of the loan, rather than just reducing the interest.
Types of stepped rate mortgage
The stepped rate mortgage has a range of options, beginning with the stepped fixed rate, which reduces a standard amount each year. There is also the discount stepped rate, which means that the rate being chosen is smaller than the lenders’ preferred amount. The discount may be around 1.5%, and will slowly decrease as the years progress. It is also possible to get a stepped rate mortgage with cashback, which provides a bonus cash reward for the borrower of around 1% of the total loan.