Buy to let offset mortgages do exist but what are they and what should you know about them.
Since the changes brought in to the UK tax law in 2017, landlords have seen more of their earnings vanish through the tax placed on them.
As landlords are now able to claim less tax relief, a buy to let offset mortgage may help mitigate the effects of rising tax costs forbuy to let landlords.
Buy to let offset mortgages will essentially allow landlords to reduce the interest payable on their buy to let mortgages.
What are Buy to let offset mortgages?
Buy to let offset mortgages are mortgages where the buy to let mortgage lender will allow you to place savings in a savings account which offset the amount of interest you have to pay on your buy to let mortgage.
Buy to let offset mortgages work like this:
When your mortgage lender comes to charge you interest weekly, daily or monthly they will simply subtract whatever savings you have in the linked savings account from the outstanding capital on your Buy to let mortgage. This amount is what they will then charge you interest on.
As an example, if you have a £600,000 mortgage and £200,000 in savings you will only pay interest on £400,000.
You’ll need to keep your savings in an account with the same bank or lender that provides your buy to let mortgage.
What are buy to let mortgages?
Buy to let mortgages are mortgages given on buy to let properties. The mortgage deposit required for buy to let mortgage may be higher than residential mortgages and the interest rates may be higher.
What are offset mortgages?
Offset mortgages are mortgages which allow you to reduce the amount of capital interest is due on your mortgage by putting savings in an offset account linked to your mortgage.
Interest is charged on the difference between the capital owed on your mortgage account and the total amount you have in an offset mortgage savings account.
How do buy to let offset mortgages help?
In the past, all of your finance costs could be offset against profits and if you are a higher rate or additional rate taxpayer, tax relief was effectively given up to 40%/45%.
This has now changed meaning that in 2017-2018 75% of your finance costs can be offset against full tax liability and 25% of your finance costs will be restricted to 20% relief. So for basic rate taxpayers there is no change but for higher rate taxpayers and above there is a significant change over the coming years. By 2020 all finance expenses will be restricted to 20% relief.
A buy to let offset mortgage could help to reduce the costs a landlord may face by putting your savings into an account linked to an offset mortgage balance you’re able to reduce the interest due. And that will help to reduce the impact of the tax relief changes.
Can you get a Buy to let offset mortgage on a HMO property?
Buy to let offset mortgages are currently not available for HMOs although this may change in the future.
Can I get a buy to let offset mortgage with bad credit?
You may be able to get a buy to let offset mortgage with bad credit but this will depend on the buy to let mortgage lender.
Bad credit could include:
A debt management plan
A home reposession
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.