Did you take the right mortgage before falling in arrears?

When trying to help people find a solution when faced with home repossession hearings because of the arrears on their mortgage, I always start by asking them a few questions like what the arrears are, do they have a redemption fee/statement etc just so that we can analyse their problem and then look at what their options are. 

The next question I ask is usually what type of mortgage they have and I must admit, I am continuously learning as to just how many different types of mortgage products there are out there. Some, I have never heard of and this led me to look into as many mortgage products I could find, just to better understand if homeowners could be better or worse off because of the type of mortgage they have.

Here are some interesting ones that I found:

Fixed Rate Mortgage

This (I admit) is an easy one and I chose this one first simply because it is the most common according to Expatica, as roughly 75% of UK mortgages are fixed rate. As the name implies, the interest rate is fixed for a period of time and is great for long term homeowners, as they know exactly the amount they have to, when they have to pay it and which stays the same for an agreed period of time.

Offset Mortgage

These are usually linked to your savings account  and help lower the interest you’ll be charged each month, so you’ll only pay interest on your mortgage minus the amount in your savings account. These are good for those who have a really healthy savings account and as many of us are not able to take advantage of saving money according to This is Money, it’s not surprising that Offset Mortgages have reduced in number over the past 2 years.

Tracker Rate

This type of mortgage sees your interest rate move up and down with a particular base rate (usually the Bank of England) and is very attractive when interest rates are low however, when interest rates move higher as we have seen over the last couple of years, this type of mortgage product can have devastating effects on household budgets, usually resulting in mortgage unaffordability.

Interest-only Mortgage

This product can initially be seen as an attractive deal as they generally have cheaper monthly repayments, as you are only paying the interest on the loan and not the principle. When the mortgage comes to an end, you still owe the original amount that you borrowed and over the long term, you will find that you are paying more interest over the term of the mortgage than if you had borrowed the same amount using a different product like a capital and interest repayment mortgage. There is also the risk that you may not be able to remortgage at the end of the term.

Buy-to-Let Mortgage

These mortgages were created for those who wished to become landlords by buying a property for the purpose of renting it out rather than living in it. They are available as interest only and repayment mortgages and have very different lending criteria to other mortgages. The applicant needs to be able to demonstrate that the rent they will collect will more than cover the monthly mortgage payments and also demonstrate this can be done at higher interest rates. The amount loaned is usually a maximum of 75% of the value of the property and the cost associated with setting up the mortgage are very much higher than the run of the mill individual mortgage. Not everyone wants to be a landlord, but for those that do, there are options.

Avoiding home repossession due to mortgage arrears can be stopped depending on your situation, but choosing the right type of mortgage in the first place is probably more of a prevention against repossession than finding a cure after you have been handed a repossession hearing.