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Offset mortgages are an alternative to a standard repayment product, where you can offset the amount you pay, against other savings held with the same lender.
With awareness of niche mortgage products growing, this guide summarises how offset mortgages work, when they can be advantageous, and how to compare rates and terms.
For independent advice about offset mortgages or other types of interest-only lending, contact mortgage brokers on 0330 304 3040 or email us at email@example.com.
Offset mortgages are linked in to your other accounts with the same lender. The balances you own are used to reduce how much interest you pay.
Repayment mortgages charge interest based on the outstanding balance. However, an offset mortgage deducts savings held from the capital balance, and charges interest only on the difference.
Interest-only offset mortgages work in the same way, although your monthly charge will be solely an interest payment, and not reduce the total balance outstanding.
Therefore, you need to have an exit strategy as with any other type of interest-only lending, and a way in which you will pay back the original amount borrowed at the end of the term.
It all depends on your circumstances.
As an illustration, if you have savings of £30,000, you can use those savings to reduce your mortgage interest payments, without withdrawing any of the cash.
If you were to take out an offset mortgage of £200,000 with the same bank, they would offset the £30k of savings, and only charge interest on the £170,000 difference.
Say the interest charge was 3% - in that case, you would pay £6,000 per year on an interest-only basis on a typical interest-only mortgage. However, an offset mortgage would reduce that cost to £5,100.
The key is to compare what you would have earned in savings interest, against the amount you save on mortgage interest payments.
If your savings account attracted a 2% interest rate, you would be better off using an offset mortgage and sacrificing that income, by saving 3% on the mortgage against the same value.
In the past, offset mortgages were less attractive since they required a high value of savings - at least 25% of the value of the property - to be a viable alternative to earnings interest on savings.
However, with low interest rates, and little earnings on savings, offset mortgages can be an excellent option where you have significant savings that you don't intend to use.
It can also be a strategy to repay your interest-only mortgage sooner, with the interest saving used to pay back some of the capital.
Another option is to use savings funds as a larger deposit towards your mortgage, and therefore negotiate lower rates on a lower LTV loan.
Given the number of comparable options, the best solution depends on your circumstances, and an experienced broker is vital to deliver independent advice about the best route to choose.
The key benefits on offer, include:
As well as many positives, there can be disadvantages to an offset interest-only mortgage:
The most crucial factor is having an exit strategy. Lenders will need to know how you will repay the capital loan value at the end of the term, and how viable your plan is.
Dome of the most commonly accepted repayment plans include:
In most cases, the lender will need to see a formal valuation to verify the anticipated value of your repayment strategy.
Generally, deposits will be higher than for standard lending.
The average Loan to Value ratio - i.e. the maximum value you can borrow against the value of the property - is capped at 75%, meaning you need a 25% deposit.
Other more specialist lenders can offer higher LTVs of 80% or even 85%, meaning you need a 15% - 20% deposit. Note that in this scenario, you’re likely to be quoted higher interest rates than if a larger deposit were available.
The best lender for you very much depends on your circumstances, how much you wish to borrow, what deposit you can offer, and what the LTV ratio is.
If you have a higher deposit of at least 25%, you will be in a stronger position to negotiate competitive rates.
Usually, yes - mainstream lenders want to see a minimum annual income from £15,000 up to £40,000, depending on how much you wish to borrow.
You should also keep an eye out for early repayment penalties, which might make an offset mortgage less attractive.
With a smaller number of lenders offering interest-only offset mortgages, the criteria are more stringent, and so you might struggle to find an offset mortgages for any property outside of your main residence.
There are offset mortgages available for properties abroad, as well as potentially commercial premises, but this is a specialist product available through a broker.
Contact Revolution on 0330 304 3040 for more information about non-standard interest-only offset mortgages.
Adverse credit issues always make a mortgage more difficult to apply for.
Offset mortgages are a specialist product with a higher level of risk than standard lending, and therefore any serious history of credit issues might make it challenging to find a lender who can consider your application.
In this scenario, it might be best to use your savings to offer a larger deposit on a standard interest-only mortgage, thereby offsetting the risk to the lender.
However, if you do have credit issues on your file and be keen to secure offset lending, there are options available. For example, if the issues occurred some time ago, or were minor, they are less likely to be a problem.
Bad credit lenders will consider mortgage applicants with:
This is less common, but yes, you can apply for interest-only offset lending on a rental property.
By leveraging savings against a buy to let mortgage, you can reduce your outgoings, increase your profit margin, and improve the viability of an investment prospect.
Not really; if you can afford the payments, and pass the affordability assessment, there isn't a maximum per se.
However, your exit strategy will be vital to demonstrate that you will be able to repay the balance at the end of the term.
The older you are, the higher the potential risk to the lender, and the harder it might be to find an offset mortgage on the mainstream market.
For offset lending past retirement, contact revolution Brokers and we will recommend the best lenders to apply to.
Second homes are another higher-risk factor for lenders, depending on whether you have another mortgage running on your main residential property.
If you are looking for offset lending on a second home, you will need to meet the eligibility and affordability requirements with a secure repayment strategy.
It can do, yes, because a non-standard property is also a higher risk, and means that the property value is likely to fluctuate, or be harder to evaluate than for a standard home.
Lenders offering non-standard property mortgages are limited, but by working with an expert broker, you have a great chance of finding the right lending product.
They can be, and provided you meet the requirements, remortgaging through an interest-only offset mortgage is fairly similar to any other kind or remortgage.
In most cases, you will need to have been with your existing lender for at least six months to be able to apply for a remortgage.
If you're interested in exploring the potential of an offset mortgage on an interest-only basis further, it is essential to consult an experienced broker who can assess the pros and cons for you.
There are multiple ways to borrow, and this may be an appealing product in some cases, but not be the most cost-effective option in others.
Contact revolution Brokers on 0330 304 3040 for independent advice from whole-of-market brokers with years of experience in offset lending.
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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature. We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.
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