Mortgage reserve account (A complete guide)

In this brief guide, we are going to talk about what a mortgage reserve account is and how having one may benefit you.

If you are trying to get on the property ladder or reduce your mortgage costs then there are certainly a lot of ways to do that.

One of those ways is by using a mortgage reserve account

What is a mortgage reserve account?

A mortgage reserve account is an account where a mortgage reserve is placed. A mortgage reserve is when a mortgage lender agrees to loan you a certain sum but advance you a certain amount and keeps the rest in a mortgage reserve account which you can drawdown on later in the future

Mortgage reserve accounts bear some similarity to offset mortgages and current account mortgages but more like a combination of the two.

How does a mortgage reserve account work?

A mortgage reserve account works almost like the overdraft you have on your current account but rather it is an overdraft facility on your mortgage.

You can dip into our mortgage reserve account when you want without having to apply for a further mortgage advance

A mortgage reserve account, therefore, provides flexibility for those who require access to capital within short notice.

When you dip into your mortgage reserve account you will essentially be borrowing more against the equity in your property and hence increasing your mortgage balance.

You can then repay hat you have borrowed separately.  Most mortgage lenders will offer a mortgage reserve account on an interest-only basis which means any capital borrowed is not due until the end of the mortgage.

Some mortgage lenders will also allow you to make repayments for the funds you have borrowed at any time without charging you an early repayment fee.

The advantages of having a mortgage reserve account

There are numerous advantages to having a  mortgage reserve account, some include:

• The flexibility of being able to borrow money at short notice may be very important to some
• Cash for an emergency will always be available and hence you are less financially vulnerable
• You don’t need to reapply and pass further mortgage affordability checks anytime you want access to funds
• You won’t have to pay interest on any of the funds sitting in the mortgage reserve account until you borrow it.

Disadvantages of a mortgage reserve account

There are also numerous disadvantages having a mortgage reserve account, they include:

• Mortgage reserve accounts will usually have a much higher mortgage rate
• You may not be able to fully repay what you borrowed by making lump sum payments without incurring early repayment charges
• Some mortgage lenders will place high early repayment charges for mortgages which have a mortgage reserve account
• Mortgage lenders who offer mortgage reserve accounts are not that many and hence you may have less competitive rates
• You may not be able to use a mortgage reserve account mortgage with a first-time buyer scheme which means you may miss out on all of the Government schemes below. You should check with the scheme provider to see if you are still eligible.

The government scheme includes:

• 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.

Which mortgage lenders offer mortgage reserve accounts?

Not a lot of mortgage lenders offer mortgage reserve accounts. 

In fact, most high street mortgage lenders have now stopped offering this product.

You can however still access this product through specialist mortgage lenders.  

A specialist mortgage broker may be able to help you do this.

Does Barclays still offer its Barclays mortgage reserve mortgage?

No, Barclays has ceased offering its Barclays reserve mortgage product but if you currently are a borrower with a Barclays reserve mortgage product and you are looking to remortgage on to another reservee mortgage product then we could help you find a suitable specialist mortgage lender.

If you want a mortgage lender who offers mortgage reserve account then there are mortgage lenders who offer this product but these are more specialist mortgage lenders.

Are you eligible for a mortgage reserve account mortgage?

If you are considering getting a mortgage reserve account mortgage then you may want to know if you are in fact eligible for such an account.

Mortgage reserve account mortgages may have much higher mortgage rates than normal mortgages and hence the mortgage affordability requirements may be more stringent.

To ensure you are able to get a mortgage reserve account mortgage, you should follow the following tips:

• Have a good credit score:. As with all mortgage products, having a good credit score will make passing the mortgage affordability checks much easier. 

If you are unsure of what your credit score is then you should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and Transunion.

Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.

Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.

If your credit score turns out to be low then you can follow the below tips to try and rebuild it prior to applying or a mortgage reserve account mortgage.

Tips to build your credit score:

1. Get on the electoral roll
2. Keep your credit utilization below 30%
3. Avoid applying for too much credit in a short space of time
4. Avoid missing credit repayments
5. Avoid being late on credit repayments
6. Get a credit builder card, a credit builder loan or student credit card to show good credit repayment behaviour
7. Avoid payday loans
8. Keep active credit accounts open for as long as possible

If you have bad credit then getting a mortgage reserve account could be much more difficult.

Bad credit could be:

1. A county court judgement
2. Bankruptcy
3. A home repossession
4. Missed credit repayments
5. Late credit repayments
6. Debt management plans
7. Individual voluntary arrangements 

• Income: As with all mortgage lenders you will need to have sufficient income to keep up on the monthly mortgage repayments and still have enough to live a normal life. 

The mortgage lender will put you through a mortgage stress test to ensure you can still afford the monthly mortgage repayments

• Employment: You will need to have suitable employment in which you are gaining your income. If you are self-employed then you may find it harder to get a mortgage reserve account mortgage. 

Mortgage lenders will place more scrutiny on your income and will require your SA302 tax calculation form and your accounts for the past 3 years although there are mortgage lenders who may accept as little as 12 months.

• Mortgage deposit: The mortgage deposit requirements for a mortgage reserve account mortgage are usually around 15%. This means the loan to value rates on mortgage reserve accounts are usually around 85% but you may be able to get a loan to value rate as high as 90%. 

By putting down a bigger mortgage deposit down you may be able to get much better mortgage rates on your mortgage reserve account.

If you have bad credit or are self-employed then you can expect to put down a much bigger mortgage deposit.

• Your age: Your age will also affect your ability to get a mortgage. If you are over 75 years of age then you may find it much harder to get a mortgage reserve account mortgage. 

Some mortgage lenders will have minimum term limits which means if you are much older and are planning on getting a shorter-term mortgage you may find it much harder.

There are however mortgage lenders who will offer mortgage reserve account mortgages to borrowers who are as old as 85.

Some other factors to consider with mortgage reserve account mortgages is that the mortgage lender may require you to have equity in your home which is more than the value of your mortgage reserve.

Some mortgage lenders may also only allow you to borrow money which you have already repaid as part of your mortgage balance.

If you had an original mortgage balance of £200,000 and repaid £50,000 then £50,000 may be the amount the mortgage lender allows you to borrow through your mortgage reserve account.

Use a mortgage reserve calculator

You can use a mortgage reserve calculator to figure out how much you may be able to borrow on a mortgage reserve account mortgage.

Each mortgage lender has their own terms on how much you may be able to borrow and hence a mortgage reserve calculator will only give you an idea of your borrowing ability.

To get a better picture of what you could borrow in a mortgage reserve account mortgage you should speak with a mortgage broker.

Use a mortgage reserve account mortgage broker

You may want to consider using an independent mortgage broker to get a mortgage.

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 rather 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 based on your mortgage affordability.

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 mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage 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.

It will also contain information on 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.

In this brief guide, we are going to talk about what a mortgage reserve account is and how having one may benefit you.

If you have any questions or comments 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.