Do you have some savings tucked away and want to help a loved one to get on the property ladder? Then consider putting your savings to work with a family offset mortgage.
What is a family offset mortgage?
This type of offset mortgage allows you to help a family member with their purchase by linking your savings account to their mortgage. The amount you have as savings is offset against their mortgage balance and interest is only charged on the difference. This reduces the amount of interest they have to pay each month. This makes it much easier for them to afford a mortgage than if they had to pay interest on the entire loan.
For example, your family member needs a mortgage of £250,000 to buy a property in Bexleyheath and you have savings of £50,000. Your savings account and their mortgage can be linked via a family offset mortgage. Interest will then only be payable on the balance of £200,000, considerably reducing their monthly payments.
Whilst this type of mortgage can be used to help any family member, it’s typically used by parents to help their children and is often referred to as a parent offset mortgage. We’ll use the parent and child example from now on for simplification.
How does a family offset mortgage work?
Your savings reduce the amount your child needs to borrow for their mortgage loan. The more savings you have, the lower the loan-to-value (LTV) ratio becomes. This increases your child’s chances of passing the lender’s affordability checks. It also allows them to benefit from a lower interest rate.
You may be wondering why you don’t just use your savings to pay a normal deposit. The difference is that your savings will be returned to you once your child has repaid a certain percentage of their mortgage, such as 25%. Plus, as mentioned above, the amount held in the savings account is offset against the mortgage balance, helping to keep your child’s monthly payments lower.
Do you need a minimum amount of savings?
Generally, lenders specify a minimum amount of savings to be approved for a family offset mortgage. You can usually expect this to be about 10% of the property’s value. Therefore, if your child has found a property in Pimlico worth £350,000, you’ll need savings of at least £35,000. Some lenders stipulate a minimum amount to be held in the savings account no matter how much the property is worth. Other lenders also insist that you have a minimum annual income.
The eligibility criteria for a family offset mortgage
Every lender has its own criteria but your child will need to pass the affordability checks to ensure the mortgage repayments can be met. If your child’s circumstances are deemed to be more of a risk, such as being self-employed, having bad credit or buying a non-standard property, not all lenders will agree to a loan. In this case, a specialist lender will offer more flexibility.
As a family offset mortgage involves you as well as your child, you also need to meet the lender’s requirements. We mentioned above that you’ll need a minimum amount in your savings account and may also have to meet a minimum income requirement.
Some lenders are very strict when it comes to who is considered to be a family member for this type of mortgage. For example, some will only allow immediate family while others will accept any legal relative. There are other lenders, though, who are more flexible and will consider friends or neighbours for this arrangement.
The benefits of a family offset mortgage
To help you at a glance, here’s a summary of the benefits that a family offset mortgage can offer:
- Your child can get on the property ladder without having to save for a deposit.
- Your savings reduce the loan-to-value (LTV) ratio, reducing the overall amount borrowed.
- A lower LTV allows your child to benefit from a lower interest rate.
- Your savings are offset against the mortgage balance. This means that interest is only charged on the difference, reducing your child’s monthly payments.
- Your savings will be returned to you once your child has repaid a specified percentage of their mortgage loan.
What alternatives are there?
If you’re still undecided about whether a family offset mortgage is right for you and your loved one, there are alternative options to consider.
Give a gifted deposit
You can give your child a lump sum as a gifted deposit. The lender may request written confirmation that it’s a true gift – as opposed to a loan that would have to be repaid – and that you won’t expect a share in the property should it have to be repossessed.
Be a guarantor
With a guarantor mortgage, you act as a guarantor for your child’s mortgage. You are liable for the mortgage payments should your child be unable to make them. Your assets are used as security by the lender. Once the loan has been adequately reduced, the lender will release you from your agreement.
Take out a joint mortgage
With this arrangement, you take out a mortgage with your child and you’re jointly liable for the mortgage repayments. Your combined incomes are taken into account so you may be eligible for a larger loan. However, if one of you cannot make the payments, the other has to step in and make them. If you’re already a homeowner and then enter into a joint mortgage with your child, the new property will be classed as your second home. As such, you’ll be liable for an extra 3% in stamp duty.
Opt for a joint borrower, sole proprietor (JBSP) mortgage
When you agree to a JBSP mortgage, you and your child are both named on the mortgage but the property deeds are solely in your child’s name. This allows your child to enjoy full ownership of their home and you won’t be liable for a second property stamp duty surcharge as you would with a joint mortgage.
Speak to an expert about family offset mortgages
Get expert guidance before making a decision about how best to help your child get a foot on the property ladder. At Trinity Finance, our mortgage brokers – located throughout Kent, London and Edinburgh – are ready to help you. They can discuss your circumstances and explain family offset mortgages and the alternative options in more detail with you.
Simply give us a call on 01322 907 000 to take steps towards helping your child buy a property. If you prefer, send us an email at firstname.lastname@example.org. With unrestricted access to the market, you can rest assured you’ll be offered the best deals available to suit the needs of both you and your child.