What is an interest-only offset mortgage?
Interest-only offset mortgages are just like offset mortgages but rather than capital repayment mortgage the mortgage is an interest-only mortgage. This means you will need to have a capital repayment vehicle in place which the mortgage lender will need to approve for your interest-only mortgage. The capital repayment vehicle will be your method of repaying the interest-only offset mortgage capital balance at the end of the mortgage term.
Most interest-only offset mortgages will be available for borrowers who are looking to buy residential properties but there may be some who will offer an interest-only offset mortgage on commercial properties. You should speak with a mortgage broker to get a better understanding of your eligibility for those mortgage products.
Can you use interest-only offset mortgages for a buy to let?
If you are looking to get an interest-only offset mortgage on a buy to let property then this may be possible. Since the tax changes in 2017
Since the tax changes in 2017 which affect the buy to let property market, this may be an attractive proposition. It allows buy to let investors to use their personal savings to reduce the tax bill they may face from their buy to let properties. Offsetting savings against your BTL mortgage reduces the amount of interest charged, which increases the profit obtained from letting, and simultaneously, your cash flow.
Can you have an interest-only offset mortgage?
Yes, you can have an interest-only mortgage as long as you meet the mortgage affordability requirements of the mortgage.
If you are much older you may struggle to find interest-only mortgage lenders who are willing to lend to you. This is especially true if you are approaching the retirement age in the UK or 75.
You may still be able to get an interest-only offset mortgage but you should speak to a mortgage broker.
What is an offset mortgage?
An offset mortgage is where you have a savings account or more linked to your mortgage account. The balance on your savings account is used to offset (subtract from) the balance on your mortgage account and interest is charged on the difference. You still have access to your savings account and can withdraw money from it at any time.
In some cases, you will be paid interest on your savings account. This interest will be based on interest offered on similar saving accounts.
How does an interest-only offset mortgage work?
An interest-only mortgage works by you putting your savings in a savings account which is linked to your mortgage. The balance in your savings account is then used to reduce the interest charged on your interest-only offset mortgage. With an interest-only offset mortgage, you will make monthly repayments which will include only the interest being applied to the balance outstanding.
In contrast on a repayment mortgage, your monthly mortgage repayments will include both a capital portion and the interest being charged on your mortgage. As you continue to make your monthly mortgage repayments, the balance outstanding on your mortgage falls.
As the balance outstanding on an interest-only offset mortgage doesn’t decrease your monthly mortgage repayments on your interest-only offset mortgage will be the same for the term of the interest-only offset mortgage. At the end of the interest-only offset mortgage term, you will need to pay the balance outstanding. This is the original capital which will then have to be repaid with your repayment vehicle at the end of the interest-only offset mortgage term.
It is important to note that throughout the mortgage term the interest-only offset mortgage lender may conduct periodic reviews of your interest-only offset mortgage repayment vehicle to ensure that it is still able to cover your balance at the end of the mortgage.
An example of an interest-only offset mortgage in theory
If you want to get an offset mortgage of £400,000 at an interest rate of 3% but you also have savings of £60,000 which is linked to your mortgage balance.
The total interest on your mortgage annually would be £12,000
By offsetting your mortgage balance you will have interest charged on £340,000.
The total interest you will then be charged on the offset mortgage balance would be £10,200.
This means you will have an annual savings of £1800 for the year if you keep your savings account balance constant for the whole year.
To even compound the benefit of the interest-only offset mortgage you could put your savings in an account which pays interest.
If we assume you had a savings account which pays interest at a rate of 2% this means you would have earned £1200 on your £60,000 in savings.
By subtracting the interest charged on your offset mortgage by the interest received on your linked savings account you would essentially have just been charged £600 for the year.
This means your interest-only offset mortgage could have cost you £600 for the year.
Please note that if you withdraw any money from your savings account this will mean that interest will then be charged on a higher balance amount.
The interest could be charged daily, weekly or monthly so it may be possible to use some of the funds in the savings account and replace it before interest is charged so to gain the benefit.
What sort of repayment vehicles can you use for your interest-only offset mortgage?
When looking to get an interest-only offset mortgage a key part of your mortgage affordability will be your repayment vehicle. The interest-only offset mortgage lender will like to see that you have a reliable plan of paying back the interest-only offset mortgage. If you are unable to show that you have a suitable plan to repay the interest-only offset mortgage then you may want to consider a part and part mortgage which will have both an interest-only mortgage element and a capital repayment element. This means at the end of the mortgage term you will have a smaller mortgage balance to pay off.
The kind of repayment vehicles that may be accepted for an interest-only offset mortgage include:
- Sale of a second property
- Stocks and Shares ISAs
- Investment Bonds
- Pension Funds
- Stocks and shares
- Endowment policies
Depending on the repayment vehicle the mortgage lender may also want to see bank statements, certification of ownership if you plan to sell a property (and evidence of any first charge mortgage or debt on the property), investment statements, valuation of stock and shares statements, saving statements, latest projection statements
You should also check in with your repayment vehicles to ensure they are on track to repay your interest-only offset mortgage. If they are not then you should get in touch with your mortgage lender as soon as possible.
What mortgage deposit do you need for an interest-only offset mortgage?
The mortgage deposit requirement for an interest-only offset mortgage will differ from one mortgage lender to another. You may be required to pay down a mortgage deposit of at least 25% but this could rise all the way to 30% depending on yourmortgage affordability.
You may be able to find some mortgage lenders who may accept below this point.
It is important to note that your mortgage deposit and your savings which you put in a linked savings account are two different things.
Unfortunately, you may not be able to get any government scheme help with your mortgage deposit as the government schemes usually insist that the benefactor is using a residential mortgage when using the government scheme.
What income do you need for an interest-only offset mortgage?
Most interest-only offset mortgages may have a minimum income of between £15,000 and £20,000 per year whilst others require at least £30,000 per year,
The income requirement for an interest-only offset mortgage will vary amongst mortgage lenders and may be based on your mortgage affordability or their mortgage product.
Some interest-only mortgage providers may also be happy with you making overpayments to your mortgage but some may have a limit on the amount you can overpay per year and most will have an early repayment charge.
Do interest-only offset mortgage lenders accept supplementary income?
Different mortgage lenders will have different eligibility requirements and acceptance rate for supplementary income. Whilst some mortgage lenders may accept supplementary income, some won’t.
Aside from this, the interest-only offset mortgage lenders who accept supplementary income may not accept 100% of the supplementary income.
If the majority of your income is from supplementary income such as benefits then you may want to find mortgage lenders that accept benefits or the particular type of supplementary income you have. You will also want to ensure they accept a high percentile of the supplementary income.
Some supplementary incomes which interest-only offset mortgage lenders may accept include:
- Pension income
- Investment Income
- Overseas earned income
- Maintenance Payments
- Rental Income
- Attendance Allowance benefit
- Carer’s Allowance benefit
- Child Benefit
- Child Tax Credit benefit
- Disability Living Allowance (DLA)
- Incapacity Benefit (IB)
- Industrial Injuries Benefit (IIB)
- Maternity Allowance benefit
- Pension Credit benefit
- Severe Disablement Allowance
- Widow’s Pension benefit
- Working tax credit benefit
The interest-only offset mortgage lender may require to see proof of any documents, start dates and end dates for the benefits etc.
Can you get an interest-only offset mortgage if you have bad credit?
Getting an interest-only offset mortgage if you have bad credit may be slightly harder but this will heavily depend on the type of bad credit you have or had and your personal circumstances. Different mortgage lenders will have different acceptance criteria on bad credit and you may be able to find a mortgage lender willing to offer you an interest-only offset mortgage based on your individual circumstances and mortgage affordability.
The reason why it may be harder to get an interest-only offset mortgage with bad credit is due to the fact that an interest-only offset mortgage will have a huge capital balance which you have to repay at the end of the mortgage term. The interest-only offset mortgage lender will likely place more scrutiny on your repayment vehicle.
When looking to get an interest-only offset mortgage with bad credit it really depends on your individual circumstances. In the case of a CCJ, Did you satisfy the CCJ? How much was theCCJ? These questions and facts may separate you from mortgage lenders who are willing to lend to you based on the circumstances and those who aren’t.
Bad credit may include:
A debt management plan
A home reposession
You may want to use a bad credit mortgage broker to see what interest-only offset mortgages you could be eligible for.
Can you get an interest-only offset mortgage if you are self-employed?
Getting an interest-only offset mortgage if you are self-employed may very well be possible but again this will heavily depend on your circumstances. If for example you are self-employed but are a portfolio landlord with a host of buy to let properties which are revenue-generating then you may find that it could potentially be easier to get an interest-only offset mortgage although you are self-employed.
Most mortgage lenders will want to see at least 3 years worth of accounts so they can generate what your monthly average income is.
Some other documents they may request could include:
- Your SA302 tax calculation form
- 3 months worth of bank statements so they can work out your monthly disposable income.
- 3 months worth of payslips if you are paid through a LTD company
- An accountants letter
- Your CV so they can see how experienced you are in this role and how long you have been working with certain third parties for
- Any contracts you may have if you are a contractor. If you have a day rate you charge they may also want to see a history of contracts and the average day rate you have charged over a specific term. E.g 3 years. They may also want to see the average length of your contracts.
- Your p60 tax return
Most interest-only offset mortgage lenders will also not like to see big gaps of unemployment. So if you have had big gaps if unemployment you may want to include reasons for this in the CV you present to the mortgage lender.
Can you get an interest-only mortgage with a government scheme?
Unfortunately most first-time buyer and home mover government schemes insist on the person using the scheme to use a standard residential mortgage with a capital repayment.
This means you may not be able to use an interest-only offset mortgage with any government schemes.
Some of the government schemes you may miss out on by using an interest-only offset mortgage will 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.
There may be some government scheme providers above who are willing to accept an interest-only offset mortgage so you should contact the scheme provider which you want to use and get confirmation.
Switching from an interest-only offset mortgage to a capital repayment offset mortgage
You may be able to switch from an interest-only offset mortgage to a capital repayment offset mortgage at any time during the mortgage term as most mortgage lenders will want to see you repay what has been borrowed to you rather than get to the end of the interest-only offset mortgage term and see you default on the balance.
Can you get an interest-only offset mortgage with non-standard construction properties?
Non-standard construction properties are usually harder to get a mortgage for as many mortgage lenders cannot accurately predict their future value or understand how the materials used could be structurally sound in 30 years or so when the mortgage term ends.
Most mortgage lenders who offer an interest-only offset mortgage on non-standard construction will likely offer it at a lower loan to value rate and you may need to have a higher income level too.
You should speak to a mortgage broker to further assess your options on this.
pros of an interest-only offset mortgage?
These mortgages can be competitive when comparing them against other mortgages.
These mortgages may allow you to overpay and reduce your balance.
You can still have access to your savings with this kind of mortgage.
Some mortgage providers will allow you to use a linked ISA account
You may be able to earn more tax-free interest than you usually would.
You offset the cost of interest by using your savings account.
Cons of interest only offset mortgages?
You may be better off using yoursavings to increase your mortgage deposit.
You may not get any interest in your linked savings account.
If you use any of the money in your linked savings account your monthly payments will increase.
The loan to value rates offered are usually lower than those offered on other mortgages.
You mayfind that not many lenders offer this type of mortgage which makes them less competitive.
You wil usuallyhave to have your linked savings account with your mortgage provider.
Can you get an intrest-only offset mortgage on a second property?
You may be able to get an interest-only offfset mortgage on a second property but this will usually be once a mortgage lender is satisfied that youcan maintain both mortgage repayments comfortably.
Can you get an interest-only offset loan?
You may be able to get an interest-only offset loan butthis will be based on if you can afford the loan repayments and your repayment vehicle to pay off the balance at the end of the loan term.
Interest-only offset mortgage calculator
There are some interest-only offset mortgage calculators out there but you should be aware that they don’t always give you a full picture of your mortgage affordability and it may be better to speak with a mortgage broker who has some experience of dealing with borrowers looking for interest-only offset mortgages.
How to get the best interest-only offset mortgage rates?
If you want to get an interest-only offset mortgage with the best rates then your best bet is to ensure you have a suitable mortgage deposit of at least 25%. This will give you a loan to value of 75% which may be competitive in the market.
How to get an interest-only offset mortgage
If you want to get an interest-only offset mortgage you may want to first speak to a mortgage broker who has some experience in dealing with interest-only mortgage lenders.
You should also prepare the initial documents you may need for your mortgage application.
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.