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Offset Mortgages - Is Interest-Only a Good Option?

An offset mortgage can be an excellent option if you have sizable savings and dramatically reduce the interest you pay on your mortgage. So, is it worth switching to an interest-only basis or applying for interest-only repayments on an offset mortgage product?

What Is An Offset Mortgage?

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 protected].

What is an Interest-Only Offset Mortgage?

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.

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Based On Your Yearly Income, You May Be Able To Borrow

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Most lenders will let you borrow 4.5 times your annual salary so, as long as you have a standard 10% deposit, you should be able to borrow this much.

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Depending on your personal circumstances, some lenders may let you borrow 5 times your salary.

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Lenders usually cap the amount they lend at 5.5 times your salary, so it’s unlikely you’ll be able to borrow more than this.

Can I Apply for an Offset Mortgage?

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.

Who Is Likely to Benefit from Using an Interest-Only Offset Mortgage?

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.

What are the Benefits of Offset Mortgages on an Interest-Only Basis?

The key benefits on offer, include:

  • Increasing the interest-saving value of funds.
  • Options to repay the balance faster.
  • Potential to offset multiple accounts - including savings, current accounts, and ISAs.
  • Retaining access to savings capital if required.
  • Savings on interest charges.
  • Tax-efficiencies in avoiding accumulating savings interest above the tax threshold.

What are the Down Sides to Offset Mortgages?

As well as many positives, there can be disadvantages to an offset interest-only mortgage:

  • Can be more cost-effective to use savings as a larger down payment.
  • Interest rates tend to be higher than on a typical mortgage.
  • Lower number of lenders offering this product.
  • LTV caps tend to be lower.
  • Offset accounts must usually be held with the same lender.
  • Potential to increase payments if any savings are withdrawn.
  • Sacrifice of interest earned on savings accounts.

What are the Eligibility Requirements for Interest-Only Offset Lending?

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:

  • Proceeds from the sale of a portfolio property.
  • Cashing in investments, or the sale of stocks or shares.
  • Endowment policies.
  • Withdrawing lump sums from a pension fund.

In most cases, the lender will need to see a formal valuation to verify the anticipated value of your repayment strategy.

What is the Minimum Deposit for an Offset Mortgage that is Interest-Only?

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.

Which Lenders Offer the Lowest Offset Mortgage Interest Rates?

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.

Do I Need to Earn a Minimum Income to Get an Offset Mortgage?

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.

Can I Get an Offset Mortgage as Interest-Only on any Type of Property?

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.

Can I Get an Offset Mortgage if I Have a Bad Credit History?

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:

  • A low, or non-existent credit score.
  • History of late payments or arrears.
  • Mortgages arrears or defaults.
  • Record of IVAs, CCJs, or DMPs.
  • Bankruptcy or repossession history.

Are Interest-Only Offset Mortgages Available for Property Investments?

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.

Is There a Limit on the Size of an Interest-Only Offset Mortgage?

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.

Can I Get an Offset Mortgage if I am Retired?

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.

Can I Get an Offset Mortgage to Buy a Second Home?

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.

Does the Type of Property Impact my Ability to Get Offset Lending?

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.

Are Interest-Only Offset Mortgages a Good Remortgaging Option?

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.

Independent Offset Mortgage Advice for Interest-Only Borrowers

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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