An Introduction to Family Offset Mortgages

Mortgages & Money

When you hear the phrase “Bank of Mum and Dad,” what comes to mind? It’s normal to visualise wealthy parents who can afford to give their children a huge quantity of money all at once. However, the truth is very different from this.

There are several applications for how it usually works in practice. How do family offset mortgages operate, and what are they for parents who want to assist their children get a foot in the housing market’s stairway of success. If you want to know what family offset mortgages are and how they can be used to help get your kids on the property ladder, this article is all about answering these questions and more.

What are family offset mortgages?

The broader category of mortgages is known as offset mortgages, of which family offset mortgages are a subset. The only variation from a standard offset mortgage is that instead of the mortgage holder depositing money into the linked account, a family member does so on their behalf.

How do they work?

Here we will elaborate a little on what was said above. The principle behind family offset mortgages is the same as that behind other types of offset mortgages: less interest is paid because savings are used to offset against the buyer’s mortgage and, therefore, reduce the amount of loan needed to be taken out.

By way of illustration, let’s assume, for the sake of argument, that you have a savings of £30,000 and your kid is hoping to get a mortgage of £250,000. Rather of paying interest on the whole £250,000, they would only have to pay interest on £220,000 if you used a family offset mortgage. That might save your child a lot of money in interest payments over the length of a mortgage.

However, there are several essential details to keep in mind before jumping right in.

For starters, the mortgage principal repayments won’t change. This means that although the interest due on the loan will be decreased (since less is borrowed), but the loan itself must still be repaid in full.
Also, the linked savings account used to offset—the account where the savings are deposited and held—often does not generate interest while it is sitting there. Because of this, it’s crucial to conduct some math before committing to a family offset mortgage. Think about your options. If you can find one, it might be better to open a savings account with a higher interest rate.
Furthermore, the interest rates on offset mortgages are often slightly higher than those on regular mortgages. Consider a lower mortgage rate as an alternative since you may wind up saving money in the long term. As you can see, before deciding on whether this type of mortgage is the best option, you will need to do some number crunching.

Of course, the amount you have in savings will be the decisive factor in this.

What is the ideal amount you will need in savings for an offset mortgage?

There is no concrete answer to this as it all depends on various factors. Lenders have varying requirements for family offset mortgages, so a lot rides on who you decide to go with.

However, as a general guide, you should look to set aside at least 10% of the total price. That means, using the same example as before, you’ll need at least £25,000 in savings to put down on a home that costs £250,000. Of course, the more you have in savings, the better.

However, certain lenders, notably the major high-street companies, may have much higher levels as a precondition to being accepted. In addition, some family offset mortgage programmes may have additional requirements, such as a minimum yearly income, that must be met. This is a field where it is crucial to shop around for the best financing possible.

Eligibility for offset mortgages

In addition to the amount of savings needed, there are other challenges to obtaining a family offset mortgage. Every type of loan has a much lower chance of being paid back if the person applying for it is considered to be a high risk.

Many different scenarios constitute a high-risk level. A low deposit, a high debt-to-income ratio, and a poor credit history are all things that will be taken into consideration. In addition to the above, the type of property that is being sought will also be a significant factor.

If you want to buy a “non-standard” home, like one with a thatched roof or one in a flood plain, you may have a much smaller pool of mortgage lenders to choose from.

However, affordability is usually the most important factor for any lender. Your ability to show the mortgage lender that you can reliably make your payments will likely come down to whether or not you fit inside the lender’s lending guidelines.

What lenders will offer this type of mortgage?

Offset mortgages involve greater complexity compared to standard mortgages, and only a select few lenders even offer them. The likes of Virgin, HSBC, and Halifax don’t see the need to provide this specialised mortgage product to customers.

Those lenders that do provide them may strive to differentiate themselves by giving their family offset mortgage a catchier name. At the end of the day, however, that’s exactly what they amount to.

Talk to a reliable mortgage broker if you’re serious about getting a family offset mortgage. They will be able to help you make sense of all the marketing speak and help you choose the right one that meets your needs and expectations.

The benefits and drawbacks of family offset mortgages

Now that we know more about family offset mortgages and how they work, we can talk more generally about the pros and cons of using them to buy a house:

Pros

A decrease in the interest payment
Mortgage borrowers can choose to either reduce their monthly payments or pay off their loan faster.
Family offset mortgages typically allow for overpayments.
High-income taxpayers may benefit from using an offset mortgage.
The savings put away is still available if needed (this will affect the interest payments though).

Cons

There is no interest earned on savings.
Offset mortgages usually have higher interest rates than regular mortgages with monthly payments.
Lender availability may be limited.
Typically, terms are not very appealing.
Limiting Factors on Loan-to-Value Ratios.
It may not be the best choice, especially if you haven’t got much saved up to offset it.

Are offset mortgages worth considering?

This will come down to everyone’s own preference. If you’re still thinking about getting a family offset mortgage, you should definitely consult with an expert in the field, such as a mortgage broker or independent financial advisor.

Competition in this sector is low since there are so few such products available to compete with. Because of this, most of the time the terms and conditions aren’t good and don’t appeal to many customers.

Additionally, about half of all first-time buyer transactions include some form of aid from the bank of mum and dad, typically in the form of help with the deposit and associated costs. In reality, most families can’t afford the additional cost of an offset mortgage. Not to mention that their savings are earning 0% interest.

There’s also the loan-to-value (LTV) ratio: 95% LTV offset mortgages don’t exist. You might be able to secure a mortgage with a loan-to-value ratio of 90% at most, but the conditions are quite unfavourable. The government’s Help to Buy programme may be the best choice for anyone in the market for a brand-new home.

Where to look for the best family offset mortgages

If you’re still considering this option, you may easily compare mortgage products from several lenders by using a comparison website. An excellent place to start is via the lender’s website, as most will have a page detailing there many family offset mortgage options.

However, be aware that some of these comparison websites are not as impartial as you may think they are. Therefore, it is best to enter your information into many sites to ensure that you obtain the most comprehensive results.

Furthermore, it’s a very good idea to seek the help of a professional mortgage broker immediately. In spite of the fact that it appears to be yet another expense you could do without, it often ends up being a good investment. Many of them will also be able to negotiate favourable rates on your behalf with a variety of lenders, both large and small.