If you need a helping hand getting onto the property ladder and a family member is happy to help with their savings, a family offset mortgage may be exactly what you’re looking for. Making your route to home ownership faster, your family member’s savings can be put to work straight away. As their savings are linked to your mortgage, you don’t need to save a deposit, you effectively borrow less and you benefit from a lower interest rate as a result.
What is a family offset mortgage?
Also known as a parent offset mortgage, a family offset mortgage reduces the interest payable on your mortgage. This is done by linking your family member’s savings account to your mortgage, at which point the savings are offset against your mortgage balance. Interest is charged on the difference rather than the mortgage loan as a whole. This reduces the interest payable each month, keeping your payments lower than if you had a standard residential mortgage.
For example, you want to buy a property in Bexleyheath that’s valued at £300,000. Your family member has savings of £50,000 and agrees to link their account to your mortgage. The interest payable will be calculated on the balance of £250,000. This means that your monthly payments will be significantly lower. As such, it’s a more affordable way to own your first home.
How does a family offset mortgage work?
Your family member’s savings reduce the loan-to-value (LTV) ratio, which is how much you need to borrow in relation to the property’s value. Typically, lenders require a minimum savings amount of 10% of the property’s value for a family offset mortgage. This means that, for the example used above where the Bexleyheath property is worth £300,000, your family member needs to have at least £30,000 in savings.
As the amount you need to borrow is reduced, you benefit from a lower interest rate. The higher the amount of savings that can be used, the lower the LTV. This, in turn, gives you access to better interest rates as you’re considered less of a risk to the lender.
The interest for your mortgage is then calculated on the balance once the savings have been offset against the loan. This helps you save a considerable amount in interest on your mortgage, making it an attractive option.
You can benefit from the reduced interest in one of two ways. One option is to make lower monthly payments, which will help to increase your normal cash flow. Another option is to reduce your mortgage term, such as from 30 years to 25 years. With this option, you make the normal monthly payments and your mortgage is repaid quicker. As the term is reduced, you end up paying less interest overall.
How long are the savings tied up for?
Your family member’s savings are linked to the mortgage for a set time. This is usually until you have paid off a certain amount of your mortgage, such as 25% or 30%. At this point, their savings no longer need to be linked to the mortgage. It’s important for your family member to understand that their savings won’t earn interest for the period they are held. This is different from other mortgages where their savings can be used to help you and earn interest at the same time, such as a family springboard mortgage.
However, this type of mortgage enables them to help you get onto the property ladder sooner without giving their savings away permanently, such as with a gifted deposit. It also means they can help make your affordability easier for the mortgage by having a lower LTV. Without their savings, you may struggle to be approved for a standard residential mortgage if you don’t have an adequate deposit. As well as that, your ongoing affordability is made easier if you opt for lower monthly payments when the savings are offset against the mortgage.
Are you eligible for a family offset mortgage?
Both you and your family member have to meet the lender’s requirements to be approved for a family offset mortgage. The lender will check your affordability for the mortgage, taking your income and outgoings into account and any outstanding debts. They’ll also check your credit rating. The type of property you’re buying can also affect your eligibility. For example, if it has a non-standard construction, it’s riskier for the lender. This can narrow down your options for a family offset mortgage.
Some lenders only allow parents to help with family offset mortgages while others accept any legal relatives, such as grandparents or close relatives. Some lenders are more flexible, however, accepting savings from close friends.
Lenders usually have a minimum requirement for the savings, such as 10% to 20% of the property’s value. Some lenders have a minimum fixed amount that has to be linked to the mortgage, such as £50,000. A minimum income requirement may also be stipulated.
The benefits of a family offset mortgage
- You can get on the property ladder sooner. Saving a deposit can take a long time and is a stumbling block for many prospective buyers. As your family member’s savings can effectively take the place of a deposit, you can look forward to being a homeowner much sooner.
- Your family member’s savings make it easier for you to be accepted for a mortgage. The savings mean that you don’t need to borrow as much for the mortgage. This makes it easier for you to pass the lender’s affordability checks.
- The lower LTV gives you access to a lower interest rate. The less you need to borrow, the lower the risk for the lender and, as such, they’ll offer you a lower interest rate. This reduces your monthly payments, making home ownership make affordable.
- You can benefit from lower monthly payments or a shorter mortgage term. As the savings are offset against the mortgage, interest is only payable on the balance, saving you a significant amount of money. You can choose whether to take advantage of this with lower monthly payments or to keep your payments higher and reduce the mortgage term instead.
- Your family member can help you out financially without giving away their savings permanently. Once you’ve repaid the agreed amount for your mortgage, your family member’s savings won’t need to be linked to the mortgage any more. This can be a preferable way to help you out rather than gifting you the deposit or being responsible for your mortgage repayments, such as with a guarantor mortgage.
- Some lenders allow your family member to access their savings. Unlike some mortgages, such as a family springboard mortgage, your family member may be able to access their savings while they are linked to your mortgage.
Are there any drawbacks to family offset mortgages?
This is a niche type of mortgage so fewer lenders offer it compared with other mortgage types. This narrows down your choices when it comes to mortgage deals. For the family member who is helping you, they may not earn interest on their savings, depending on the lender. Whilst they can access their savings, the lender is likely to stipulate a minimum amount that must remain in the account and your mortgage payments will probably increase. Your family member also has to rely on you repaying the agreed amount of your mortgage before their savings are released. As a huge financial commitment, if there are any issues, this may put a strain on your relationship.
Is a family offset mortgage right for you?
Whether or not a family offset mortgage is right for you depends on your circumstances as well as those of the person willing to help you. There are many other options available, such as using a gifted deposit, applying for a government scheme that’s designed to help first-time buyers or applying for another type of mortgage, such as a joint mortgage, a guarantor mortgage or a joint borrower sole proprietor mortgage.
Our mortgage brokers are here to go through all of the options with you. They’ll provide you with comparisons and impartial advice so that you can make the right decision for your needs. Just give us a call on 01322 907 000 and get started on your journey to home ownership.