What is a family offset mortgage?
In this brief guide, we are going to discuss what a family offset mortgage is and how it can potentially help you get on the property ladder.
What is a family offset mortgage?
A family offset mortgage is a type of mortgage which allows family members to put their savings into a savings account linked to a mortgage account in order for it to offset the interest being charged on the mortgage.
A family offset mortgage or parent offset mortgage is termed as it is usually provided by family members to other family members.
The savings account where the funds are paid into is held in the name of the mortgage owner and not the family member providing the savings.
A parent could provide savings to their child which is paid into a savings account linked to a mortgage. This reduces the amount of interest which is paid on the mortgage as the savings are subtracted from the mortgage balance to provide the mortgage balance which interest is charged on.
This means the monthly mortgage repayments can be much smaller based on the amount put into a savings account by the family member.
Family offset mortgages can be a good option for people looking to get on the property ladder and have parents who have access to large savings.
In some cases interest can also be earned on the savings and this interest can essentially be tax-free due to the fact that it is offsetting a mortgage.
When referring to a family offset mortgage in this article we will use the example of a parent providing the savings for their child throughout the rest of this guide.
How does a family offset mortgage work?
A family offset mortgage works by allowing a family member to deposit their savings ina savings account which is linked to your mortgage
These savings will be used to offset the mortgage balance on your account and derive a figure which interest is then charged on. So, in essence, the more you have in a linked savings account the less interest you will potentially pay on your mortgage.
How do they work?
Offset mortgages are linked to your savings account to let you reduce how much interest you are charged. Your savings are not used to pay off your mortgage.
Lenders deduct this amount from your mortgage balance and only charge you interest on the remaining amount.
For example, if a mortgage of £600,000 is needed for you to purchase your home and your parents have £100,000 which they can deposit in a linked savings account in your name then your mortgage balance would be £500,000 and you will make your monthly mortgage repayments based on a mortgage balance of £500,000 for as long as the funds in the linked savings account remain £100,000.
If you increase or decrease the funds in the linked savings account you will subsequently decrease or increase the mortgage balance which interest is charged on.
You don’t necessarily have to get a family offset mortgage,you could instead use the savings you would have put into a savings account as a mortgage deposit or a gifted mortgage deposit from your parents.
The only difference is that whilst you will have much more liquidity with the family offset mortgage, you will need to apply for a remortgage to get access to your cash if you put it down as a mortgage deposit and a remortgage application could take a substantial amount of time and still be rejected if you don’t meet the mortgage lenders mortgage affordability requirements.
Usually with a family offset mortgage the savings are returned to the family member once the mortgage borrower has paid back 20% to 30% of their outstanding mortgage balance
Should you get a family offset mortgage?
A family offset mortgage could be of great benefit if you are struggling to raise a sufficient mortgage deposit or if you don’t qualify for any of the government schemes (possibly because the property you want to buy is above the price limit the government schemes will permit) below which could help you raise a mortgage deposit or reduce the cost of the property you want to purchase.
A family offset mortgage would also mean that you could potentially gain access to more favourable mortgage rates due to a reduced loan to value band.
A family offset mortgage could also still allow the family member providing the savings to earn interest on their savings.
Parents who want to help their children get on the property ladder may also find this a suitable alternative to a gifted mortgage deposit as they won’t have to give money away and can expect to have their funds back once their child has paid 20 to 30% of the outstanding mortgage balance.
Alternatives to a family offset mortgage
Aside from a family offset mortgage, there are also various ways which you can fund your mortgage deposit and get on the property ladder. One of these ways is by using a government scheme which funds your mortgage deposit or reduces the initial cost of getting on the property ladder.
Some of the government schemes available today include:
- Lifetime ISA– gives you a government bonus of £1,000 if you save the maximum £4,000 a year.
- Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
- Help to buy equity loan- gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
- Shared ownership- You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
- Armed forces help to buy- similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
- Rent to buy- This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
- Right to buy- allows you to buy your home at a discount price.
- Preserved right to buy– same as above.
- Right to acquire- same as above.
Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.
Types of family offset mortgages
There are several mortgage lenders offering a different variation of a family deposit mortgage, this includes:
the Barclays family springboard mortgage
the Lloyds lend a hand mortgage
A family deposit mortgage from the Loughborough building society
Each one of these mortgages works in its own unique way. We will briefly define how they work and what some of their benefits are.
The Barclays family springboard mortgage
The Barclays family springboard mortgage is a type of family deposit mortgage where your family members or friends put away 10% of the property price in a Barclays saving account over 3 years for a fixed interest rate. This means you will get a 90% loan to value mortgage.
You get a fixed rate on your mortgage for 3 years and after the 3 years, you move on to the mortgage lenders standard rate.
Your family member will get back their savings plus interest after 3 years if you have made all your mortgage repayments on time.
If you have not made all your mortgage repayments on time or defaulted on your mortgage then the home could be reposessed and your family members may have their funds held for much longer.
The Lloyds lend a hand mortgage
The Lloyds lend a hand mortgage is a type of family deposit mortgage which is similar to the barclays family springboard mortgage where a family member puts away 10% of the property price in a Lloyds saving account for 3 years at a fixed interest rate. This means you will get a 90% loan to value mortgage.
The Lloyds lend a hand mortgage will then allow you to get a fixed-rate mortgage fo the first 3 years after which you will move over to the mortgage lenders standard variable rate.
Your family member will then get their savings back after 3 years if you have made all your mortgage repayments on time.
If you have missed your mortgage repayments then the mortgage lender may hold your family members funds for much longer. This could also be the case if you have defaulted on your mortgage and the property has been repossessed.
The post office family link mortgage.
The post office family link mortgage is a type of family deposit mortgage where your family member uses 10% of a mortgage-free property to fund your mortgage deposit. You and the family member will be on the deed of your new mortgage and the mortgage lender will offer you a mortgage with a loan to value of 90% meaning you don’t need to pay any mortgage deposit towards this specific type of family deposit mortgage.
For the first 5 years of the mortgage, you will make two payments. One towards your family members 10% equity which is an interest-free advance to you. You make the second payment towards your 90% loan to value mortgage..
After the first 5 years, you will revert back to making one mortgage repayment towards your mortgage.
The family mortgage from the family building society is a type of family deposit mortgage where your family member can use the equity in their home or their savings as security for your mortgage so you can get access to mort affordable first-time buyer mortgage rates.
You will still need to put down a mortgage deposit of at least 5 % and your family members can provide security of up to 25%.
They can do this in one of three ways:
Use the equity tied up in their home with the Security Through Property option provided by the family building society
Deposit money in a savings account that earns interest with a Family Security Account
Deposit money in a Family Offset Account that doesn’t earn interest but reduces the cost for the borrower by reducing the mortgage on what interest is charged
“ source- Huuti
Who can get a family offset mortgage?
As with any mortgage you will need to prove that you meet the mortgage lenders mortgage affordability requirements.
If you have bad credit or are a self- employed borrower then this may be harder to do and using a bad credit mortgage broker or a self-employed borrower may help you. If you are buying a property with non-standard construction or you have a complex income then you may also find it hard to get a mortgage.
When looking at a family offset mortgage, different mortgage lenders will have their own criteria as who can be counted as a family member.
Some mortgage lenders such as Barlcnas and Nationwide will not allow friends to be counted as family members but will only accept legal relatives such as aunts, uncles etc.
There are also some mortgage lenders who will insist that the family member can only be a member of your immediate family hence our brother, sister, father or mother.
Then there are family offset mortgage lenders who will agree to a friend being the family member who provides the savings.
Usually, as long as you can prove an existing relationship with the person providing you with the savings then the mortgage lender may be more willing to accept them.
How much can you save with a family offset mortgage?
Some mortgage lenders may have a minimum criteria on how much they will accept on a family offset mortgage but this minimum is usually based on the price of the property.
Example of a family offset mortgage:
if the savings requirement is a minimum of 10% of the property price and you want to buy a £600,000 house then your family member will need to put down a minimum of £60,000 into a linked savings account.
Some mortgage lenders may also have a minimum you must have in the linked savings account regardless of the properties price.
Some family offset mortgage lenders will also have a minimum income requirement of £75,000 or higher.
Family offset mortgage calculator
If you want to see how a family offset mortgage could potentially look then using a family offset mortgage calculator may be your best bet. Most family offset mortgage lenders will have a family offset mortgage calculator on their sites but these calculators are in no way a true reflection of your mortgage affordability the mortgagee the lender may be able to offer you.
If you are unsure of your mortgage affordability then you could speak with a mortgage broker who can help you work out what your true mortgage affordability could be and which mortgage lenders may be willing to lend to you.
Where to find the best family offset mortgages?
If you are unsure of where to find the best family offset mortgages then speaking to a mortgage broker may be best.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases. This could be over 11,000 mortgage products. This may have some advantages than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your remortgage is indeed a possibility before you make a full mortgage application. Once you have found a home you want to buy or are satisfied with the mortgage offer for your remortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it, they will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.
FAQs about the family offset mortgage
Below are some of the most frequently asked questions about family offset mortgages.
Is an offset mortgage worth it?
Offset mortgages could be worth it as they help get you on the property ladder with relatively low costs and the funds which you use for the offset mortgage are still available to you via the savings account. Offset mortgages may also allow you to earn interest on your savings which further goes to offset the interest being charged on your mortgage.
You may see offset mortgages as being worth it when you consider the potential savings on the interest paid on your mortgage.
Are offset mortgages still available?
Yes, offset mortgages are still available from mortgage lenders such as Barclays, Lloyds, the family building society and post office mortgages.
Can you withdraw money from an offset account?
You may be able to withdraw money from an offset account if the savings account where your money is deposited places no restrictions on you withdrawing money from it.
If you withdraw money from your savings account be sure to put it back before the interest being charged on your mortgage account is applied if not your monthly mortgage repayments could go up due to your mortgage balance going up as a result of you withdrawing money from your offset account.
Is an offset mortgage a good idea?
Yes, you may see an offset mortgage as being a good idea due to the fact that it will allow most first time buyers to get on the property ladder without having to put down so much money. Offset mortgages can also be a good idea for higher and additional-rate taxpayers because you are effectively putting interest earned on your savings towards your mortgage tax-free.
Does an offset account reduce monthly repayments?
Yes, an offset mortgage will reduce your monthly mortgage repayments as the mortgage balance is reduced by the amount you have in the linked offset savings account. This means interest is charged on a smaller mortgage balance and hence the monthly mortgage repayments are less as long as your savings remain in the linked savings account.
What is the benefit of an offset mortgage?
Some of the benefits of an offset mortgage include:
Offset mortgages ensure you are able to get on the property ladder quicker.
If you are a higher tax rate payer the offset mortgage will help you by potentially reducing your tax liability as the interest earned on your savings cancels the interest being charged on your mortgage balance.
Offset mortgages mean you can pay off your mortgage balance quicker.
Can you overpay on an offset mortgage?
Yes, you can overpay on an offset mortgage by essentially paying more into the linked offset savings account. Your mortgage balance will reduce and this means you will pay off your mortgage faster.
Are offset mortgage savings protected?
This depends if your savings are kept in a type 1 or type 2 account. A type 1 account is when the savings are kept in an independent savings account which should have the financial services compensation scheme of £85,000 per account.
A type 2 account is when your savings are kept as part of your mortgage account and if your mortgage lender goes bust then the savings will be used to pay off your mortgage balance. You should check what account your savings are put in and how your savings are protected before signing up to an offset mortgage.
What is the difference between offset and repayment mortgage?
An offset mortgage and repayment mortgage are pretty similar, the only difference is that the mortgage balance on an offset mortgage is reduced based on how much you have in the linked savings account. An offset mortgage can either be a capital repayment mortgage or an interest-only mortgage.
Can you get a family offset mortgage with bad credit?
Getting a mortgage a family offset mortgage with bad credit may be difficult as mortgage lenders may usually want to lend to borrowers who have a good credit score and have shown a good repayment history on all their previous debts.
There are however mortgage lenders who will offer a family offset mortgage to a borrower depending on what type of bad credit was and what the circumstances were.
If it was a CCJ which was satisfied and is a certain age then some mortgage lenders may be willing to lend. Other mortgage lenders may lend if the CCJ was a maximum amount.
When looking to get a mortgage with bad credit the requirements from different mortgage lenders will differ and a bad credit mortgage broker may be able to assist you in getting a family offset mortgage.
Bad credit could include:
A debt management plan
A home repossession
Can you get a family offset mortgage if you are self-employed?
Getting a family offset mortgage if you are self-employed is certainly possible but most mortgage lenders may want to see your accounts for 3 years at the very minimum although there may be mortgage lenders willing to offer a family offset mortgage with less than 3 years worth of accounts but at least 12 months.
The documents you may need as a self -employed mortgage include:
Your SA302 tax calculation form
Your company accounts if you work through a limited company
You may find using the services of a mortgage broker who has experience dealing with self-employed borrowers.
Other considerations a mortgage lender may take into account when offering a family offset mortgage to a self-employed are:
The Trading style: are you drawing a salary from a company or do you have a claim over a share of retained profits. These could make a significant difference on how much you may be able to borrow.
Your experience: how long have you been self-employed and what is your working history.
In this brief guide, we have discussed the Family offset mortgage. If you have any questions or comments then please let us know.
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.