Interest only offset mortgage

Interest-only offset mortgages – How do they work, and where to get one?

There are many ways that mortgages work. The simplest way to get a mortgage is to save a 10% deposit and then borrow the remaining mortgage balance over 25 years.

There are other options for those with unusual financial circumstances; an interest-only mortgage is one of them.

This product is used when a buyer doesn’t have enough cash to pay for the property but has future income to help them pay their mortgage.

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What is an interest-only mortgage offset? How do they work?

This type of mortgage has two key features:

• “Interest only” is a way to make your monthly payments, not the loan amount. Only the interest will be paid. The mortgage term ends, and the balance is typically repaid.
• “Offset” means that your mortgage is linked with a cash savings account. The money in the account earns no interest and is theoretically deducted from the amount you owe. This lowers the monthly interest on your mortgage loan.

Here’s an example. Suppose you have a £200,000 mortgage and £50,000 in savings.

These savings can be used to offset your mortgage. Instead of paying interest on the entire amount, you’ll only have to pay interest for £150,000. This interest will be paid monthly, and you’ll repay the £200,000 loan at the end.

There are advantages and disadvantages.

Here are the top benefits of an interest-only offset mortgage:

• You can lower your monthly payments by putting your savings toward your mortgage
• You will save money if your mortgage’s interest rate does not exceed the cash savings interest rates.
• You still have your savings, so you can access them whenever you need them.
• Because you don’t make capital repayments, your monthly payments will be lower.
• An offset mortgage will reduce your tax bill because you won’t get interested on the savings you offset

There are always some drawbacks to an interest-only offset mortgage which include:

• This type of mortgage has higher interest rates than other types.
• Your savings won’t earn interest, so inflation will reduce their value in the long term.
• Your mortgage payments will rise if you have to draw on your savings.
• You will need to devise a plan to repay the entire amount of the original loan amount at the end of your mortgage.
• A few lenders only offer this type of mortgage

These drawbacks are why you might consider whether it would be better to use your savings to make a larger deposit.

This could allow you to access higher interest rates and reduce monthly payments, meaning that your wealth is locked up in property and not available in cash.

Before you apply for an offset loan, you need to speak with a broker

It’s a good idea to consult a broker specialising in the niche product before applying for an interest-only offset mortgage. They can assist you in many ways…

• They will be happy to answer your questions about interest-only mortgages and other options.
• Based on your financial situation, they will offer their expert opinion about which mortgage type is best for you.
• No matter what type of mortgage you choose, they will help you compare rates from different lenders and make the most of their market knowledge to help you find the best rate for your situation.
• They will assist you in completing your application, making the process faster and more efficient.

Lenders and eligibility criteria for interest-only offset mortgages

Only ten lenders offer offset mortgages. These include Barclays and Accord Mortgages. They may offer an offset mortgage with interest only in certain situations.

Eligibility requirements (e.g., credit history) are the same as for other mortgages. Credit history, age and credit history are generally the same for mortgages. You can learn more about general mortgage criteria here.

There are, however, some differences with interest-only mortgages.

Type of property

You can’t use interest-only mortgages to purchase your primary residence. These are a much more popular choice for a buy-to-let transaction or a second house, otherwise known as an offset buy-to-let mortgage. Your repayment strategy may involve the sale of another property.

However, fewer lenders offer them on a residential basis.

Repayment strategy

Your lender will need to know how you plan to repay the loan amount at the end of the mortgage term. While the methods allowed by lenders vary, they include:

• Selling another property (mortgaged, unmortgaged).
• An existing Endowment Policy or IISA
• An annual lump sum (e.g. bonuses)
• Other investments
• A Pension lump Sum

Income

The minimum income requirements for each lender offering this type of mortgage differ and may vary depending on your circumstances. Scottish Widows, for example, requires that you have a minimum income of £100,000. If your repayment strategy involves the sale of a mortgaged home. Others do not have a minimum income requirement.

Deposit

These mortgages are riskier than others, so they require a higher deposit of up to 25% of the property’s actual value.

Match with an expert in interest-only offset mortgages

This is a very niche market, and not all brokers are qualified to help you.

Talking to someone who can understand both interest-only and offset mortgages is essential. You will need to speak with someone familiar with these mortgages’ nuances if you are looking at them because of your unusual income.

We have hundreds of brokers to choose from and provide a matching service to help you find the right specialist for your needs. This service is free, and you can chat with a broker specialising in interest-only offset mortgages.

FAQ

Can I remortgage an offset mortgage that is interest-only?

Yes. A broker can help you find better rates and lenders for remortgages. Your new lender will require you to meet their eligibility and affordability requirements.

Can I get an interest-only offset mortgage if I have bad credit?

It all depends on your credit history. Lenders will not offer interest-only offset mortgages to applicants with severe credit problems, such as bankruptcy or county court judgments. It might still be possible if you have late payments or a history of defaults.

Can you get 100% off your interest-only mortgage?

Although a few lenders may allow this, it isn’t very often unless you go through mortgage brokers.

Due to the different interest rates on savings and mortgages, there is likely to be a discrepancy. Credit interest is calculated based on how many days are in a calendar month. Debit interest divides the year into twelve, and each month is treated equally.

Example: If you have credit interest in March, it will accumulate over 28 days. However, interest on your mortgage debt for March would be calculated based on one-twelfth of the year.