Step Up Step Down Home Loans
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A step up mortgage is one where the calculated interest rate, or more specifically the spread, increases over time (usually with each year.
A step down mortgage is the reverse version where the payment rate reduces over time. Also usually with each year.
However, the step up or step down structure usually only occurs during the initial years of a loan. Potentially stretching for more than 5 years.
After which they switch to a fixed spread throughout the life of the loan.
Step down home loans can be popular with home buyers as seeing interest rates going down over time can be an attractive feature of home loans. This is even though it eventually switches to a constant spread in the long run.
Step down and step up housing loans are usually only available as loans for under construction property.
This is because lenders are not stupid. They are willing to offer such types of loans, especially the step downs, because for the payment of properties under construction (BUC), payments towards developers are staggered instead of one lump sum.
The schedule of payments are usually determined by milestones reached during the construction process until completion
For example, a step down mortgage might have a structure of:
- Year 1 SIBOR + 0.50%.
- Year 2 SIBOR + 0.40%
- Year 3 SIBOR + 0.30%
- Thereafter SIBOR + 0.85%
It is more than possible that for a condominium apartment unit that only 50% of the loan amount has been disbursed in year 3. Meaning that only 50% of the loan amount would get to enjoy the lower rate of SIBOR + 0.30%.
By the time the property is fully constructed, TOP, and ready for residing, it is almost certain that such loan would enter the phase of thereafter rates. This is also the time when the loan facility has been fully disbursed, making the full debt amount liable for the higher interest rates.
So keep this in mind when sourcing for loans for BUC property.
Loan packages with low thereafter rates tend to be better in the long run.
However, step up and step down loans can be suitable for investors and speculators who have the full intention to sell their properties in a sub-sale transaction.
They get to enjoy very low interest rates at only a portion of the total loan amount while looking for a buyer to purchase the properties before they are completely built.
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