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Offset Buy to Let Mortgages

12th May 2022

By James Jones

Offset buy to let mortgages

An offset buy to let mortgage gives you the ability to use your savings to reduce payable interest on your mortgage. If you have a decent sum of money already saved up, you could noticeably reduce your mortgage payments. For example, if a buyer had a mortgage of £175,000 and they had £25,000 in their savings account, they would only have to pay interest on the £150,000 sum. Landlords could make good use of offset buy to let mortgages as it will help alleviate tax costs.

Buy to let mortgages are conventionally offered on an interest-only basis. This is mainly to help with affordability. So every month, the interest is paid off, but no money is paid towards the equity in the property. Lenders usually require more thorough calculations to help determine whether a buy to let mortgage is the right option and this has been the case for some time now. 

An offset mortgage links the mortgage with a current account. So, lenders assume that the balance owed is reduced by the balance that is held in the offset current account. As a result, this then “reduces” the balance, leading to the lender calculating the interest rate on this lower balance.

Some borrowers may decide to not make overpayments on the mortgage and just simply deposit money into the offset account. This helps lower your interest rate whilst still having the benefit of access to your offset account. Ultimately, offset mortgages can offer more flexibility by allowing access to the money in the offset account. While the funds are not being used, they can reduce your monthly interest rates.

Watch this video about the pros and cons of offset mortgages

Pros and Cons of Offset Buy to let Mortgages

There are pros and cons to consider regarding Offset Buy to let mortgages that could help you understand whether offset buy to let mortgages are right for you. 

Pros

More savings equals less interest

One key benefit to offset buy to let mortgages is that you could decrease the amount of interest that you would have to pay on your mortgage. This depends on how much money you have in your savings account that you would want to offset. The more money you have in savings, the less interest you could end up paying for on your mortgage. 

Pay off your mortgage sooner

In addition, with an offset buy to let mortgage, you could potentially pay off your mortgage quicker than a standard mortgage plan. For example, if you are paying 3% interest on your mortgage and you are only getting 1.5% on your savings then the obvious choice would be to offset.

Individual savings accounts (ISAs)

Some lenders may permit the offsetting of current accounts as well as Individual savings accounts (ISA). This can be ideal as you don’t have to pay any tax with ISAs meaning your savings will not dwindle over time. Which in regards to offsetting the ISA – means your interest rate should not be negatively affected.  

Cons

On the other hand, there are downsides to offset buy to let mortgages that could put you off the idea. There could be more financially efficient solutions available.

New tax system

It could be more financially beneficial to use your cash savings towards the initial deposit, instead of as part of an offset mortgage. Before April 2017, you could deduct your mortgage interest payments from your rental income, before paying tax on it.

However, the rules have now changed. Since 2020, private landlords cannot claim tax relief on mortgage interest payments. Instead, the full rental income will be taxed. To replace the tax relief system, the mortgage interest payment will be eligible for 20% tax credit instead. Depending on salary and other forms of incomes, landlords could end up in higher tax brackets. Therefore, there will be even more tax to pay.

For example, a landlord owns a property that generates £12,000 a year in rent. The mortgage interest payments are £8,000.

The landlord will be taxed on the full rental income. (Basic rate taxpayers – £2,400 / Higher rate taxpayers – £4,800).

The landlord can claim a 20% tax credit on their mortgage interest payments – £1,600.

The total tax bill for the basic rate taxpayer will be £800. The total tax bill for the higher rate taxpayer will be £3,200.

Less choice

The mortgage and the linked savings account usually have to be set up with the same lender. This could reduce the amount of options available to you. Also, a number of lenders do not offer offset mortgage plans.

Insufficient funds for LTV deposit

Lenders that can help with an offset buy to let mortgages could potentially request a loan to value (LTV) ratio of at least 75%. Therefore, you would require a deposit of at least 25%. Which could cause issues if your deposit does not cover the 25% required.

Using offset savings could set you back

If a withdrawal needs to be made from an offset savings account, it could increase your interest rates and/or your monthly payments. That can become a struggle if you require some extra money for a specific circumstance. Taking out any money could increase the amount of time you may have to spend paying off your mortgage. 

Alternatives to offset buy to let mortgages

You may want to consider the alternatives to offset buy to lets. The good news is that there are other avenues to explore which could be a better option.

Taking out a secured loan could be a viable alternative depending on your circumstances. Secured loans are usually much easier to obtain as you’re using an asset as a guarantee on your payments. To find out more about secured loans click the button below

If you are a landlord, it could be a good idea to remortgage to a lower rate if possible. The offset rate may not be as good overall in regards to your savings in comparison to the best deal. The best thing to do would be to speak to an advisor to help you find the right solution. 



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