Offset buy-to-let mortgages

Offset buy-to-let mortgages are a unique financial product that provides an innovative way for landlords to manage their property investments more effectively. By linking a savings account to their mortgage, property investors can potentially reduce their interest charges and pay off their mortgage sooner. This arrangement can offer significant advantages, but it also has its complexities and is not the right choice for everyone. This guide will delve into the ins and outs of offset buy-to-let mortgages, helping landlords understand how they work, their benefits, drawbacks, and how they compare to other types of buy-to-let mortgages.

What exactly is an offset buy-to-let mortgage?

An offset buy-to-let mortgage is a specific type of mortgage product that allows the mortgage borrower who is buying a property to rent out to ‘offset’ their savings against the mortgage debt. This essentially means that the borrower’s savings are deducted from the mortgage balance for the purpose of calculating the interest due.

How do offset buy to let mortgages work?

Offset buy-to-let mortgages function in a similar manner to regular offset mortgages but are designed for properties that are bought to be rented out. Here’s a step-by-step explanation of how they work:

1. Setting up the Mortgage and Linked Account: The offset mortgage is set up much like any other mortgage, with the primary difference being that a savings account (or sometimes multiple savings accounts or even a current account) is linked to the mortgage. The accounts linked must be with the same financial institution.
2. Mortgage and Savings Balance: Say you have a buy-to-let mortgage of £250,000, and you have £50,000 in your linked savings account.
3. Interest Calculation: The interest on your mortgage is then calculated on the net balance, which is the mortgage balance minus the savings balance. So, in this case, your interest is calculated on £200,000 (£250,000 mortgage – £50,000 savings) rather than the full £250,000 mortgage.
4. Payment Structure: Your mortgage payments are still calculated on the full mortgage amount (£250,000 in our example), but because you’re only paying interest on £200,000, a larger portion of your payment is going towards paying off the mortgage principal. This can potentially shorten the length of the mortgage term.
5. Access to Savings: In most cases, you still have access to your savings. However, if you withdraw from your savings account, the amount offset against your mortgage will decrease, and your interest will be calculated on a higher balance.
6. Rental Income: With a buy-to-let mortgage, the expected rental income from the property is often considered when deciding how much you can borrow.

How to get an offset buy-to-let mortgage

Getting an offset buy-to-let mortgage involves a similar process to getting a regular mortgage but with a few extra considerations due to the offset and buy-to-let components. Here’s a step-by-step guide:

1. Do Your Research: Learn about offset buy-to-let mortgages to understand if this product is the right choice for you. It’s important to familiarise yourself with the benefits and potential drawbacks. Each lender might have slightly different offerings, so it’s crucial to compare various products.
2. Check Eligibility: Lenders will have certain eligibility criteria that you need to meet. This can include income requirements, credit score requirements, and sometimes restrictions on the type of property you can buy. For buy-to-let mortgages, lenders usually also consider the potential rental income from the property.
3. Seek Professional Advice: Speak with a mortgage advisor or financial advisor who can provide personalised advice based on your financial situation. They can also help you understand the tax implications of an offset buy-to-let mortgage, which can be complex.
4. Collect Necessary Documents: You’ll typically need proof of income, bank statements, proof of address, identification, and details about the property. For buy-to-let mortgages, you may also need to provide evidence of potential rental income.
5. Apply: Once you’ve chosen a lender and product, you can submit your application. This will usually involve a credit check and possibly a valuation of the property.
6. Review the Offer: If your application is accepted, the lender will provide a mortgage offer outlining the terms of the mortgage. Review this carefully and make sure you understand all the terms before accepting.
7. Legal and Administrative Steps: You’ll need a solicitor to handle the legal aspects of buying the property and setting up the mortgage. This will include things like conveyancing, checking the property’s title, and handling the funds from the mortgage lender.

Can I get an offset buy-to-let mortgage?

Whether you can get an offset buy-to-let mortgage will depend on several factors:

1. Your Financial Situation: You’ll need to have a stable income and a good credit score to qualify for most mortgages. Lenders will also look at your other financial commitments, like any existing loans or credit card debt, to assess your ability to afford the mortgage payments.
2. The Property: The property you’re buying to let must meet certain criteria set by the lender. For example, some lenders may not lend on properties of non-standard construction, or they might have restrictions on the number of bedrooms or the location of the property.
3. Potential Rental Income: For buy-to-let mortgages, the potential rental income from the property is an important factor. Most lenders will want the rental income to be 125-145% of your mortgage payment, though this can vary.
4. Your Savings: For an offset mortgage, you’ll need to have savings that you can offset against your mortgage debt. The more savings you have, the more you can potentially save on your mortgage interest.
5. Age: Some lenders may have age restrictions for buy-to-let mortgages. For example, they might require that you be under a certain age when the mortgage term ends.
   Remember that each lender has its own criteria and may interpret your situation differently, so it’s worth shopping around or using a mortgage broker who can help you find the best deal.

Can I get an offset mortgage on an HMO?

As with a regular offset mortgage, it is technically possible to get an offset buy-to-let mortgage on an HMO or House in Multiple Occupation. However, it’s important to note that not all lenders will offer this type of product due to the increased perceived risk associated with HMO properties.

HMOs often require more management than single-occupancy properties because they house multiple tenants, not all from one family, each renting out individual rooms. This can lead to higher tenant turnover and the potential for more wear and tear on the property, thus increasing the risk for the lender.

To obtain an offset buy-to-let mortgage on an HMO, you’ll likely need to meet more stringent criteria. These can include:

Experience: Lenders may require you to have previous experience as a landlord and potentially specific experience managing HMOs.

Financial Stability: You may need a larger deposit and a solid credit history to prove your financial stability.

Potential Rental Income: Lenders may require proof that the potential rental income from the HMO is significantly higher than the mortgage payments.

Regulatory Compliance: HMOs are subject to specific regulations, and you may need to demonstrate your understanding of these regulations and your ability to comply with them.

Eligibility criteria

Eligibility criteria for an offset buy-to-let mortgage can vary significantly between lenders, but generally, they might include the following:

Age: Most lenders have a minimum age requirement, typically 18 or 21, and may also have a maximum age by which the mortgage term must end.

Income: Lenders will need to see proof of a stable income and may have minimum income requirements. They’ll also take into account any other financial commitments you have.

Credit History: You’ll generally need a good credit score to qualify for an offset buy-to-let mortgage. If you have a history of missed payments or other negative marks on your credit file, it may be harder to get approved.

Deposit: You’ll need a deposit, and this is often a larger percentage of the property’s value for buy-to-let mortgages compared to residential mortgages. The deposit for an offset buy-to-let mortgage might be anywhere from 20% to 40% of the property’s value, depending on the lender’s criteria and the specifics of the mortgage product.

Rental Income: For a buy-to-let mortgage, lenders will usually require that the expected rental income from the property is a certain percentage higher than your mortgage payment.

Landlord Experience: Some lenders may require you to have experience as a landlord, especially for HMOs or other non-standard rental arrangements.

Savings: Since it’s an offset mortgage, you’ll need to have some savings that you can offset against your mortgage debt. The more savings you can offset, the more you can potentially save on your mortgage interest.

Property: The property you’re buying will also need to meet certain criteria set by the lender. Some lenders may not lend on certain types of properties or properties in certain locations.

How much could you save?

The amount you could save with an offset buy-to-let mortgage depends on several factors:

Mortgage Amount: The larger your mortgage, the more you stand to save in interest payments.

Interest Rate: The higher the interest rate on your mortgage, the more you save by offsetting your savings against your mortgage.

Amount of Savings: The more savings you have to offset against your mortgage, the more interest you can save.

Term of the Mortgage: The longer the term of your mortgage, the more interest you’ll pay over the life of the loan, so the potential savings from an offset mortgage are also greater.

To give you an idea, let’s say you have a buy-to-let mortgage of £200,000 at an interest rate of 4% per year, with a term of 25 years. If you had £50,000 in a linked offset account, you’d only be charged interest on £150,000 of your mortgage. This could potentially save you thousands of pounds in interest over the life of the mortgage and also help you pay off your mortgage more quickly.

However, keep in mind that offset mortgages often come with higher interest rates or fees compared to conventional mortgages. So, while you can save on interest payments with an offset mortgage, it’s important to also consider any additional costs.

Which lenders offer them?

Offset buy-to-let mortgages are less common, and the availability of these products may change over time based on various factors, such as market conditions and the lenders’ individual product strategies. Here are some lenders:

1. Barclays
2. Scottish Widows Bank
3. Yorkshire Building Society
4. Coventry Building Society

However, not all of these lenders may offer offset buy-to-let mortgages. Also, please note that some smaller lenders or specialist lenders may offer these types of mortgages as well, even though they are less common.

Are offset mortgages possible with limited companies?

Offset mortgages for limited companies were less common but not entirely unheard of. This is mainly due to the complexity of commercial lending and the fact that lending to a limited company is typically seen as a higher risk than lending to an individual.

Limited company buy-to-let mortgages have become more popular in the UK as changes to tax regulations have made it potentially more tax efficient for landlords to operate through a limited company rather than as an individual. The interest paid on the mortgage can be considered a business expense, reducing the amount of corporation tax paid by the company.

However, offset mortgages are more complex and less common in general, especially so for limited companies. If a lender does offer such a product, they might have stricter criteria and might require personal guarantees from the company’s directors.

If you’re considering getting an offset mortgage for a limited company, it would be wise to consult with a mortgage broker or financial adviser. They can provide advice based on your specific circumstances and help you navigate the complexities of commercial mortgages and tax planning.

Benefits of using an offset mortgage for buy to let

Using an offset mortgage for a buy to let property can offer several benefits, depending on your individual circumstances. Here are some of the potential advantages:

Interest Savings: The primary benefit of an offset mortgage is the potential to save money on interest. The balance in your linked savings account is offset against your mortgage balance, reducing the amount of interest you pay. This can lead to substantial savings over the life of the mortgage.

Flexibility: Offset mortgages often come with flexible features. For example, you might be able to overpay your mortgage without penalty or withdraw from your savings if needed. This can provide you with more control over your finances.

Faster Repayment: Because a larger portion of your monthly payments goes towards paying off the principal (thanks to the reduced interest), you might be able to pay off your mortgage faster.

Tax Efficiency: If you’re a higher-rate taxpayer, an offset mortgage can be tax efficient. In the UK, you can’t deduct tax from savings interest, but you don’t earn interest on the money in your offset account, you simply pay less interest on your mortgage.

Make Your Savings Work: If you have a substantial amount of savings earning a low-interest rate, offsetting those savings against your mortgage can be an effective way to ‘earn’ a better return on those funds.

However, it’s worth mentioning that offset mortgages can come with higher interest rates or fees compared to standard buy-to-let mortgages. Therefore, it’s crucial to weigh the potential savings against any additional costs. Also, remember that your circumstances might change over time, affecting the benefits you can get from an offset mortgage.

Are there any drawbacks?

Yes, while offset buy to let mortgages can offer several potential benefits, there can also be drawbacks to consider:

Higher Interest Rates or Fees: Offset mortgages often come with higher interest rates or fees compared to standard mortgages. Therefore, while you can save on interest payments with an offset mortgage, these savings might be offset by the higher overall costs.

Lower Return on Savings: Your savings in an offset mortgage account do not earn interest. So, if the interest rate on your mortgage is lower than what you could earn in a high-interest savings account, you could potentially lose out on returns.

Less Access to Lenders: Not all lenders offer offset mortgages, and even fewer offer offset buy-to-let mortgages. This means you might have fewer options to choose from, which could potentially make it harder to find a mortgage that suits your needs.

Risk of Spending Your Savings: Because you can generally access the savings you’ve offset against your mortgage, there’s a risk you could be tempted to spend this money, which would decrease the amount you’re offsetting and therefore increase your mortgage interest.

Complexity: Offset mortgages are more complex than standard mortgages, which can make them harder to understand. This can make it more difficult to compare offset mortgages with other types of mortgages or to calculate the potential benefits.

Requires Discipline: To make the most of an offset mortgage, you’ll need to be disciplined about not dipping into your savings unless absolutely necessary. If your savings decrease, so will the benefits of the offset.

These potential drawbacks mean that offset mortgages are not the best choice for everyone. It’s important to carefully consider your own financial situation, including your savings habits, financial discipline, and future plans, when deciding whether an offset mortgage is right for you.

What other types of buy-to-let mortgages are there?

Buy-to-let mortgages come in various types, much like residential mortgages. Here are some of the most common types:

Fixed-Rate Mortgages: These offer a fixed interest rate for a set period, usually between 2 and 5 years, although longer terms may be available. This can help with budgeting, as your payments won’t change during the fixed-rate period.

Variable-Rate Mortgages: These have an interest rate that can change, usually in line with the Bank of England base rate or the lender’s standard variable rate. These can offer lower initial rates, but your payments can go up or down.

Tracker Mortgages: These are a type of variable-rate mortgage where the interest rate ‘tracks’ a particular rate (typically the Bank of England base rate) at a set margin above or below it.

Discount Mortgages: These offer a discount off the lender’s standard variable rate for a set period. The rate can still go up or down, but you’ll pay less than the full standard variable rate.

Portfolio Mortgages: These are designed for landlords with multiple properties, allowing them to manage all their properties under a single mortgage.

HMO Mortgages: These are for properties that will be let out to multiple tenants, such as a house in multiple occupation (HMO).

Each type of mortgage has its own advantages and disadvantages, and the best one for you will depend on your circumstances and goals as a landlord. It’s recommended to speak with a mortgage broker or financial advisor to understand the best option for your individual situation.

Offset buy to let mortgage rates

Interest rates for offset buy-to-let mortgages can vary widely based on several factors. These include:

Lender Policies: Different lenders have different criteria for setting interest rates. Some may offer competitive rates to attract borrowers, while others may set higher rates due to the perceived risk or the cost of providing the offset facility.

Market Conditions: Broader economic conditions can influence interest rates. For example, if the Bank of England base rate is low, mortgage rates are generally lower, and vice versa.

Borrower Characteristics: Your personal financial situation can also affect the interest rate you’re offered. If you have a large deposit, a good credit history, and a stable income, you may be able to access better rates.

Property Characteristics: The type and location of the property you’re buying can affect the interest rate. Properties that are considered higher risk, such as HMOs, might come with higher rates.

Offset mortgages often come with slightly higher interest rates compared to standard mortgages, reflecting the added flexibility and potential benefits they offer. You might expect offset buy to let mortgage rates to be in the region of 2% to 5%, but it’s important to note that rates can change over time and vary between lenders.

For the most up-to-date and personalised information, consider speaking with a mortgage broker or financial adviser. They can help you understand the rates currently available in the market and how different factors might affect the rate you’re offered

Specialist advice for landlords

Being a landlord involves a range of responsibilities and decisions, and obtaining specialist advice can be invaluable in ensuring you’re making the best choices for your situation. Here are some areas where you may want to seek expert advice:

Financial Planning: Financial advisors or mortgage brokers can guide you on choosing the right mortgage, understanding tax implications, and managing cash flow effectively. They can also help you plan for the long term, considering factors like interest rate changes, property market fluctuations, and your retirement plans.

Legal Advice: Landlords must comply with a variety of laws relating to property safety, tenant rights, and contract terms. A solicitor or legal advisor can ensure you’re fulfilling these responsibilities, reducing the risk of disputes or legal issues.

Insurance: It’s important to have the right insurance coverage as a landlord. An insurance advisor can help you understand the types of coverage you might need, such as buildings insurance, contents insurance, and landlord liability insurance.

Property Management: If you own multiple properties or don’t live near your rental property, you might benefit from a property management service. These professionals handle tenant queries, property maintenance, and rent collection on your behalf.

Accounting: As a landlord, you’ll need to pay income tax on your rental income minus allowable expenses. An accountant can help you understand your tax obligations, claim relevant expenses, and plan for future tax liabilities.

Regulation: It’s essential to keep up to date with changes in regulation, such as safety standards, tenant rights, and local licensing schemes. Joining a landlord association can give you access to information and advice on these topics.

Alternatives to offset buy to let mortgages

There are several alternatives to offset buy-to-let mortgages. The best one for you will depend on your individual circumstances and financial goals. Here are some of the main alternatives:

1. Standard Buy-to-Let Mortgages: The most straightforward alternative is a regular buy-to-let mortgage. These are often simpler to understand and may come with lower interest rates or fees than an offset mortgage. They can be either repayment or interest-only, depending on your preference and financial situation.
2. Buy-to-Let Remortgage: If you already own a buy to let property and want to release some of the equity, you might consider remortgaging. This can allow you to take advantage of lower interest rates, change the terms of your mortgage, or release cash for renovations or other investments.
3. Limited Company Buy-to-Let Mortgages: If you operate your property business through a limited company, you might consider a limited company buy-to-let mortgage. These can be more tax-efficient in some cases due to recent changes in UK tax law, but they are often more complex and can come with higher interest rates or fees.
4. Portfolio Mortgages: If you’re a professional landlord with multiple properties, a portfolio mortgage might be a suitable alternative. This allows you to manage all your properties under one mortgage, potentially simplifying your financial management and offering economies of scale.
5. Flexible Mortgages: These offer features such as the ability to make overpayments, underpayments, or take payment holidays, giving you some of the flexibility of an offset mortgage without the need to have a linked savings account.
6. Tracker, Fixed-Rate, or Discount Mortgages: These are types of interest rate deals that you could consider depending on your outlook on interest rate movements and your need for certainty about your mortgage payments.

Can I offset my mortgage against rental income and tax?

When you earn rental income from a property, you have to pay tax on the profit you make. You no longer deduct mortgage interest directly from your rental income. Instead, you receive a tax credit equal to 20% of your mortgage interest costs. This is less advantageous for higher and additional rate taxpayers.

As for offset mortgages specifically, they don’t directly change the tax situation. The offsetting happens on the lending side: the savings balance you hold is offset against your mortgage, reducing the interest you pay. This doesn’t affect the taxable rental income you receive or the expenses you can deduct for tax purposes.

The tax rules around buy-to-let properties can be complicated, and mistakes can be costly. Therefore, it’s always a good idea to get professional advice from a qualified accountant or tax adviser. They can help you understand how the rules apply to your personal situation and how to make the most of any allowable deductions or reliefs