Stepped Rate Mortgages

Stepped rate mortgages offer new home buyers a range of choices relating to their home mortgage loan, since the term 'stepped rate' actually encompasses a variety of options. The first choice you would make when shopping around for stepped rate mortgages is whether you would prefer a step-up mortgage or a step-down mortgage. The stepped part of the loan happens during the initial mortgage period, usually between two and five years, and after which you would revert to paying the lender's standard variable rate.

Stepped rate mortgages can be fixed, for example, with an interest rate of 6% in the first year, 5% in the second year and 4% in the third year, or they can offer a set discount off the lender's standard variable rate of say, 1% in the first year, 2% in the second year and 3% in the third year. Further options would enable you to link your stepped rate mortgage to the Bank of England base rate. Stepped rate mortgages are particularly suited to first time buyers with substantial refurbishment or development costs in the first year of their mortgage, because they would have the opportunity to save on the mortgage over this period. Also, if you anticipate being on a fluctuating income for the initial term of your mortgage, having a discounted interest rate that gradually increases could provide you with some much-needed financial stability.

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Stepped Rate Mortgages: Your Options

• Stepped fixed rate mortgages: these are lower risk option, because you will know exactly what your interest rates will be during each stage of the initial mortgage term. 
• Stepped discount rate mortgages: The discount would usually be from the lender's standard variable rate (SVR).  The SVR is the lender's default rate, and one which all customers automatically switch to when they are at the end of their initial period.  The discount would be of say, 2% in the first year, 1.5% in the second year etc.
• Stepped base rate tracker mortgages: Your interest payments would be linked directly to the Bank of England base rate, so for example, you may be offered a rate 1% above the base rate for the first year, 1.5% above it for the second, and so on.  It is worth checking to see if your lender imposes a minimum cap on the interest rates, should the base rate dip below a certain level.
• Stepped rate mortgages with cashback: With this mortgage type, the lender would couple a lower interest rate with a cash back bonus of typically 0.5% or 1% of the total mortgage amount, which can then be used as you see fit.  This is very useful for first-time buyers with furniture expenses, building work to complete or Stamp Duty to pay.