An offset buy to let mortgage is known as a legitimate way to reduce the amount of interest you pay on a loan and could mean you make a lower amount of mortgage payments every month. However, the topic is certainly confusing.
This is why we begin this article by looking at a real life example of offset buy to let mortgages and how they work in real life to help you gain a better understanding.
There are also some cons to be aware of that means taking out an offset buy to let mortgage isn’t the right choice for everyone so be sure to read this article in detail and begin the process of understanding from the very beginning.
An example of an offset buy to let mortgage in real life
If you’re struggling to wrap your head around the idea of having an offset buy to let mortgage, it is best explained with an in real life example where there are numbers and statistics to show you it works.
How a standard buy to let mortgage works
Let’s imagine you have a property that is on a buy to let mortgage and it makes £1,500 every month in rental income and the total mortgage is £200,000 and there is a 4% interest rate on the loan. This means you will pay £8,000 every year just in interest.
This £8,000 will be paid over a few years during the fixed term of the buy to let mortgage as the mortgage is interest only so only requires this small payment in order to be paid off.
How an offset buy to let mortgage works
If we go by the same numbers in the example where there is a £200,000 mortgage and 4% interest on the loan but now let’s assume that you have £50,000 in savings in an offset savings account.
With an offset buy-to-let mortgage, your savings would be used to offset the mortgage balance which would result in you only paying interest on the difference between your savings and the mortgage balance.
In this case, the mortgage balance would be reduced by the savings amount, so you would only pay interest on £150,000 instead of £200,000 and your annual interest payments would be reduced from £8,000 to £6,000.
However, you would still have access to your savings if you needed it and the interest earned on your savings would not be taxed too so it is essentially a way to invest your money while also benefiting from some level of cost reduction.
This might make an offset buy-to-let mortgage a useful alternative for landlords with a significant amount of money in savings who wish to lower their mortgage interest rates while still having access to their savings.
Are offset mortgages possible with limited companies?
If you are looking for an offset mortgage, unfortunately, they are not currently available for limited enterprises because no lenders offer such mortgages. You may still get a Buy-to-Let mortgage if you run a limited corporation.
However the actual mortgage can only be taken out in a personal name as the offset must be paid form the personal income of someone rather than the money from a business.
What is the best way to obtain an offset buy to let mortgage?
Obtaining an offset buy to let mortgage is actually fairly simple as you have to prepare the documents you’re going to use in your application such as the official documents that you have to use to prove your identity.
This is true with any mortgage as there is a lot of regulation surrounding applying for loans in this way as mortgage lenders want to minimise the risk they take on and being able to verify identity, proof of income and address is very important to prevent fraud.
The next step of the process would be to work out how much money you want to add to the mortgage you have in order to reduce the interest on the loan. As you do this, making sure your credit score is good enough for approval is something you can do too.
This is it! After you have provided documentation and have verified the amount of savings you have, all you have to do is make sure that you are getting a good deal and one that is suitable to you by shopping through mortgage products.
This can be done by hiring a mortgage broker or getting advice directly from a lender or the bank.
What are the rates for an offset buy to let mortgage?
Offset Buy-to-Let mortgages are an excellent option because of the flexibility they provide as because just a few lenders provide them, interest rates are often higher than those for normal Buy-to-Let mortgages.
A typical rate of a mortgage for instance could be around 3.5% for two years, followed by a current rate of 6%. This would also depend on the interest rates of the banks and lenders due to the state of the economy.
As well as this cost, it is useful to remember that there is often an additional processing cost that is put in place by a lender which usually works out to around £1,000 and could be more if you have additional services like insurance or a broker.
In comparison, a conventional BTL mortgage that is not offset may have a smaller initial rate of around 2.5% for two years, then go to a variable rate of maybe 4.5%, and no product costs are required.
This is not to say that an offset mortgage is always more expensive as it all depends on how much you have saved and whether you expect to need to use the savings you are putting into the mortgage in the future. Also, things like the buy to let allowable expenses are also a factor
Is it possible to obtain an offset mortgage for a Home of Multiple Occupancy?
Contrary to popular belief, it is not actually possible to obtain an offset mortgage for a HMO. This is because only regular buy to lets are available for this type of mortgage due to the extra regulations on HMO property.
Having said this, it is suitable for you to offset the mortgage on buy to let and then once the mortgage is paid off, convert the property to a HMO perhaps with another remortgage. Or by just changing the regulations of the house.
What are the benefits of an offset mortgage?
For many reasons, having an offset buy-to-let mortgage can be quite beneficial and a landlord can most definitely benefit from one if they decide to go to the bank and qualify for this type of loan.
To begin, it can lower the amount of interest you must pay on your mortgage and implies that you’ll pay less in the long term.
You will also be able to make lower monthly mortgage payments, which will be a big incentive for a landlord as they will be able to budget better and perhaps be able to expand their property portfolio a bit quicker.
Another advantage is that you can shorten the length of time in which you are taking out the mortgage so you will be in debt for a shorter period of time. You’ll also be able to access your money if necessary, which may come in handy in an emergency.
It’s crucial to remember that, while this sort of mortgage has several benefits, each borrower’s situation is unique and if you need the savings soon, then investing in an offset mortgage would not be a good idea.
Having said this, if the funds are needed, you can always take your money back out off the offset mortgage but increase the amount of interest you’re paying.
What are the drawbacks of an offset mortgage?
While there are many upsides to this type of mortgage, it’s critical to be informed of any potential pitfalls when contemplating an offset buy-to-let mortgage. To begin you may be required to make a higher deposit than typical.
This deposit is most of the time at a minimum of 25% which might be rather considerable spending on the amount of savings you have and especially if the mortgage you have has a lot of equity in it.
As an example, a mortgage that has a 25% offset mortgage that has £500,000 equity will need £125,000 in savings. On the other hand, if the mortgage was just £50,000 then you would only need £12,500 in savings.
Another thing to bear in mind is that there are just a few lenders who provide this product. As a result, you may have fewer alternatives than with other forms of mortgages.
Repayment
Repayment mortgages aren’t normally available for a set period of time as they stretch for a longer period of 20 plus years.
This is often the period that the mortgage is converted to after the fixed term is up, requiring the borrower to begin repaying both the principal and the interest each month.
How to decide if an offset buy to let mortgage is worth it?
In order to work out if an offset buy to let mortgage is the right move for you. You should look into the following points to weigh up the pros and cons.
Speak to a lender
Lenders are usually able to advise you on the best ways to go about taking on a new mortgage. If you are trying to take on an offset buy to let mortgage with the same lender you originally had the mortgage under this is even better.
This is because a lender you have worked with previously is better able to understand the deal.
Calculate everything
You should definitely do your calculations carefully to ensure that you are actually going to be saving the money you expect or making the return on money you expect.
Speak to a mortgage advisor
A mortgage advisor is a great idea because they are paid to give their advice without any incentives. However, be careful about this as some brokers and advisors are biassed or incentives to give out certain loans.
Nonetheless, in general, this should give you some unbiased advice that you can apply to the market straight away.
What are the different types of buy to let mortgages?
Now you know all about what an offset mortgage is, it is worth making notes of the other types of buy to let mortgages and what they mean to help solidify your knowledge on the topic.
Interest only
An interest-only mortgage is a form of house loan in which the borrower is only obliged to pay the interest on the borrowed amount each month, rather than the principle amount. This implies that monthly mortgage payments will be cheaper than with a standard repayment mortgage.
Yet, because the borrower is not repaying any principle, the amount owing on the mortgage remains constant during the loan’s length.
At the conclusion of the mortgage term, the borrower must repay the whole amount borrowed in one lump sum payment or renegotiate the loan.
In conclusion
When looking at the topic of offset buy to let mortgages in more detail, it is fair to say that there are some good advantages to the process but this type of loan is still not right for everyone.
Offset mortgages are fairly complex and require a homeowner to take a fair amount of risk as they have to subject themselves to the commitment of making mortgage payments every month.
So, consider your options carefully and be sure to take into consideration the range of things that can go wrong alongside the range of mortgage products available before making a final choice.
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