Stepped Rate Mortgages

Stepped rate mortgages are a great way to save money, especially
for people who want to minimize their monthly mortgage payments
when they first buy their home. A stepped rate mortgage offers
different interest rates during the term of the mortgage. Most stepped
rate mortgages offer a discount rate to begin with, which rises after a
certain time, and then rises again.

Other stepped rate mortgages start with a higher interest rate, which
gradually decreases over the term of the mortgage. A stepped rate
mortgage with a five-year term may have as many as 10 different
interest rates during that time, which offers the borrower several
different interest rate options over the five-year period.

There are a few different types of stepped rate mortgages, each geared
for a specific type of homebuyer:

• Stepped with cash back - This type of stepped rate mortgage is
geared toward first time buyers who are short of money. Typically, they
offer a .5% or 1% cash back bonus, coupled with an initial rate that is
discounted off the bank’s usual mortgage rates. This rate will gradually
rise to match or be slightly higher than the usual rates. The cash can
be used for any moving expenses,
or can often be used to pay down the principal of the mortgage.
• Stepped tracker - These stepped rate mortgages are designed for the
buyer who wants to keep their payment as low as possible. The interest
rate is tied to the Bank of England Base Rate, which fluctuates throughout
the term of the mortgage. For example, for the first six months it may
be .5% higher than the base rate, then 1% higher for a year, and so on.
These stepped rate mortgages are good if you do not mind gambling
that the base rate will stay low.

• Fixed steps - This is a lower-risk type of stepped rate mortgage, and
is good for buyers who want to be sure of their interest rate throughout
the term of their mortgage. In either descending or ascending steps,
the mortgage will go through several different predetermined interest
rate changes. This is a good fit for people who want to know precisely
what their payment will be throughout their mortgage term.

When you are shopping for a stepped rate mortgage, be sure to look
at what sorts of early re-mortgaging or payoff penalties exist for that
product. Many stepped rate mortgages will make you pay a hefty price
for trying to re-mortgage after the first (and lowest) interest rate expires.
You want the most flexible product possible in order to be able to take
advantage of changing market conditions throughout the term of your mortgage.