Head of Content
Mortgage Advisor & Director
Stepped mortgages offer an intriguing alternative to traditional fixed-rate and variable-rate mortgages. They’re designed for borrowers who want to start with a lower interest rate that gradually increases over time.
But how exactly do they work, are they still available in the UK and what are the best alternatives to consider? Read on to find out…
What is a Stepped Rate Mortgage?
A stepped rate mortgage is a type of mortgage loan where the interest rate changes over a set period of time in predetermined intervals. The interest rate starts at a lower level and gradually increases at specific intervals, typically every few years.
This type of mortgage is designed to give borrowers an initial period of lower monthly payments, allowing them to ease into homeownership. After the initial period, the interest rate "steps up" to a higher level, which can result in higher monthly payments.
How do they work?
As with fixed rate mortgages, stepped rate mortgages are designed to offer the security of a rate that doesn’t fluctuate like a tracker mortgage would. However, the interest rate on these products is agreed in advance and will gradually increase at predetermined intervals.
A stepped rate mortgage is a distinctive type of mortgage that offers the following benefits:
-
Starts with a lower initial interest rate
-
Gradually increases over time
-
Allows borrowers to benefit from lower repayments in the early stages of the loan
-
Provides more financial flexibility
It’s important to note that a stepped rate mortgage is not for everyone. It’s most suitable for individuals who want a lower initial rate and are willing to accept the risk of the rate increasing in the future.
Who are they aimed at?
Stepped rate mortgages can be advantageous for borrowers who anticipate an increase in their income over the course of the loan. They also provide borrowers with more flexibility in their budgeting, as they can use the lower initial payments for other expenses.
For example, a borrower may anticipate an increase in their income over the next few years or a reduction in other expenses that would enable them to handle a higher mortgage payment. Scenarios include:
-
Graduates who expect a pay increase after obtaining higher qualifications.
-
Professionals expecting to receive a promotion or salary increase.
-
Individuals who are nearing the end of paying off a significant loan or debt.
-
Those who are expecting an increase in their income due to starting a business.
However, stepped rate mortgages may not be suitable for all borrowers. The uptick in interest rates after the initial period means that a borrower's monthly payments could become difficult to manage without an increase in income.
Ultimately, stepped mortgages are best suited for people who want to benefit from low initial payments but can handle the possibility of higher payments over time. This type of loan may not be suitable if you have concerns about your ability to make future payments or need financial security over the long-term.
Are stepped rate mortgages still available in the UK?
They are very rare in this day and age. Principality Building Society launched a stepped rate product in 2021 but not many lenders have done so since. It may, however, be possible to find a mortgage that works this way or similarly through a mortgage broker.
Most people who are in the market for a stepped rate mortgage end up better served by one of their alternatives, which include other variable and flexible fixed rate products such as:
Click any of the links above to get detailed information about each of these alternatives.
Explore your mortgage options with an expert
Things to consider before applying for one
When considering a stepped rate mortgage, it’s important to be aware of the potential risks involved. As with any loan, it's important to understand how the interest rate increases will affect your repayment schedule and overall budget.
You should also understand the mortgage terms and any options for switching to a different type of mortgage. For example, some stepped rate mortgages may have an option to switch out of them after a certain period. Finally, consulting with a qualified mortgage advisor is always recommended before committing to a stepped rate mortgage. They can help you assess your financial situation and recommend the best option for your needs.
Pros and cons
While stepped mortgages offer a unique combination of variable and fixed-rate products, it’s important to weigh the advantages and disadvantages before deciding if this type of mortgage is right for you.
Advantages and benefits include:
- Lower interest rate in the early stages, reducing monthly payments.
- Lower monthly payments mean more funds are available for other spending.
- The interest rate increases gradually over time, allowing borrowers to plan ahead and adjust their budget accordingly.
- Borrowers may benefit from the ability to switch out of a stepped mortgage after a certain period.
On the flip side, the main disadvantages of stepped mortgages are that:
- The interest rate will increase at predetermined intervals.
- This will result in higher mortgage payments over time.
- This can lead to financial strain if the borrower’s income doesn’t increase as expected or if other financial challenges arise.
- You're likely to incur an early repayment charge if you exit your stepped mortgage early.
Additionally, if interest rates decline, borrowers with stepped mortgages may not benefit from the lower interest rates, as their mortgage payments will still be based on the higher stepped rate. This means they could potentially miss out on savings compared to those with traditional variable-rate mortgages.
Can you get a stepped rate mortgage with bad credit?
Even borrowers with adverse credit may still be eligible for a stepped mortgage, depending on the severity of the credit issues and the amount of time that has passed since the issues occurred. This makes stepped mortgages a viable option for those with less-than-perfect credit histories.
Please seek expert advice before you apply for a mortgage with bad credit. This will help you make the right decision and get the best loan for your needs.
Do you need a broker to get a stepped rate mortgage?
It is highly recommended. Working with a whole-of-market mortgage broker can provide numerous advantages during the application process. These professionals have access to a diverse range of mortgage products from various lenders and can assist you in comparing different options and finding the most advantageous deal.
In addition to helping you secure the best mortgage for your situation, a mortgage broker can provide expert advice and save you time and effort in the application process.
At Teito, we're 100% independent which means we've got your best interests in mind. We'll provide you with whole of market advice and help you find the most suitable stepped mortgage for your needs. Get started today and find out what we can do for you.
FAQs
Bridging loans tend to be more flexible than mortgages in terms of the options available, and stepped rate products have appeared on the market before. Saxon Trust launched such a product in 2022 and it may be possible to find more lenders through a specialist broker.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.