Different Types of Mortgages Explained

Different Types of Mortgages Explained

The vast majority of people take out a mortgage when purchasing a property but how many different
types of mortgage are there and which one is right for you?

With a wide variety of mortgage deals available, it’s important to understand the difference between
them so that you can make an informed decision about your finances. After all, you’ll be paying off
your mortgage for a long time to come, so it’s important to get it right!

Here, we take a look at some of the most common types of mortgages and explain which ones are
most likely to result in repossession.

Repayment Mortgage

A repayment mortgage means you pay off both the capital of the loan and the interest over time. This
means that you will gradually pay off the entire mortgage loan and build up equity in the property.
Once the mortgage is paid off, you will own the property outright.

Interest-Only Mortgage

An interest-only mortgage means you will only pay off the interest on the mortgage loan, rather than
the capital. Although this can reduce your monthly repayments, it can also increase the risk of house
Repossession.

If you get to the end of your mortgage term and you have only repaid the interest, for example, you
will need to pay off the capital in order to keep your home. If you do not have the funds to pay off the
capital, you are unable to extend the term of the mortgage, and you cannot get a remortgage, you
may struggle to keep your home.

Once you have decided whether to take out a repayment mortgage or an interest-only mortgage, you
will be able to determine what type of interest rate you want to pay:

Fixed Rate Mortgage

A fixed rate mortgage means that the interest rate is fixed for as long as the deal remains in place.
Some fixed rate mortgage deals run for just one year, while others run for three or five years. As the
end of your fixed rate mortgage term approaches, you will need to compare the mortgage deals that
are available and apply for another fixed rate deal or switch to a different type of mortgage, such as a
variable rate.

Fixed rate mortgages provide stability as you will know exactly how much your mortgage repayments
will be but, if the base rate falls during this time, you could end up paying more than you would have
done if you had opted for a variable rate. Conversely, if the base rate rises while you have a fixed rate
deal in place, you will be protected from this increase.

Variable Rate Mortgage

As the name suggests, a variable rate mortgage means that the interest rate you pay can change at
any time. Although the interest rate is typically dependent on the Bank of England base rate, there are
different types of variable rate mortgage available, such as:

Standard Variable Rate Mortgage

A standard variable rate (SVR) is set by the mortgage lender and is not directly linked to the Bank of
England base rate. However, it is influenced by the base rate and is likely to rise or fall in accordance
with changes in the base rate.

Tracker Mortgage

A tracker mortgage mirrors the Bank of England base rate, with a few points added by the lender. So,
if the base rate falls, your monthly repayments will decrease but, if it rises, you will need to pay more
each month.

Discount Mortgage

A discount mortgage means you pay a discounted version of the lender’s SVR. The discount is fixed so
the amount you will pay can still vary in line with the SVR but, you will pay less than if you had a
standard variable mortgage. However, discount mortgages are usually only available as an
introductory offer, so you may not get the discount for long.

Buy to Let Mortgage

If you want to buy a property and let it out to tenants, a standard residential mortgage is unlikely to
be suitable. Instead, you will need to take out a buy to let mortgage that’s designed for landlords. Buy
to let mortgages can be either repayment or interest-only mortgages, although it is more common for
landlords to opt for interest-only mortgages due to the lower monthly repayments.

Although buy to let properties can be a good investment, this type of mortgage also carries a
considerable amount of risk, which is why they can be more likely to end in repossession.

If you are unable to find tenants to rent the property, for example, you may struggle to make your
monthly repayments to your mortgage lender. Alternatively, if the property needs essential works
carried out, you may be unable to let it until these are completed. As well as being forced to find the
funds to cover these costs, you will also be missing out on rental income while you are unable to let
the property.

Other Types of Mortgages

There are many different types of mortgages available in the UK and it is important to consider all of
the options. You may decide to link your savings and your mortgage liability via an offset mortgage,
for example, or you may want to increase your borrowing power by taking out a guarantor mortgage.

With so many types of mortgages available, getting independent advice should be a top priority before
you buy a home. Working with a mortgage broker may also enable you to find the best mortgage deals
and can be an effective way to secure competitive rates.

What Type of Mortgage Should I Get?

There are many factors to take into account when you are deciding what type of mortgage is right for
you. Although it may be tempting to rush in and try to secure any type of mortgage when you are
eager to buy a house, it is always best to take your time getting independent legal and financial advice
before you make such a big decision about your finances and your future.

Can I Switch Mortgages to Avoid Repossession?

If you are struggling to make your monthly repayments, switching to a different type of mortgage
could be a viable way to avoid repossession. Alternatively, switching from an interest-only mortgage
to a repayment mortgage could increase your monthly repayments but it may enable you to avoid
repossession when your mortgage term comes to an end.

At HomeKeep Solutions, we specialise in helping families keep their homes. No matter what type of
mortgage you have, we can help you to retain your property if you are under threat of repossession.
To find out more, contact our friendly team of legal experts now and find out to avoid house
repossession.