Would you use an offset BTL mortgage?

It can be difficult to make your money work as hard as possible. With interest rates now at an all-time low of 0.25%, many investment vehicles and saving accounts are underperforming. A buy-to-let offset mortgage can help you get more out of your savings by reducing your interest bill.

Offset mortgages allow clients to link their buy-to-let mortgage account to one or more current or savings accounts. Any cash savings in the current or savings accounts is offset against the size of the loan, reducing the interest payable.

Let’s say you have a buy-to-let offset mortgage of £200,000 and linked cash savings of £20,000. By offsetting the savings, you only pay interest on £180,000 of the buy-to-let loan. But as the payments are based on the full loan amount, the excess becomes a capital repayment.

Examples of offset mortgage repayments

First monthly repayment

  • payment calculated on £200,000 loan at 5.10% per annum: £850.00
  • size of actual interest repayment on £180,000: £765.00
  • capital repaid: £85.00
  • outstanding loan balance: £199,915

Second monthly repayment

  • payment calculated on original £200,000 loan at 5.10% per annum: £850.00
  • size of actual interest repayment on £179,915: £764.64
  • capital repaid: £85.36
  • outstanding loan balance: £199,829.64

Twelfth monthly repayment (loan balance: £199,044.82)

  • payment calculated on original £200,000 loan at 5.10% per annum: £850.00
  • size of actual interest repayment on £199,044.82: £760.94
  • capital repaid: £89.06
  • outstanding loan balance: £198,995.82

Advantages of a buy-to-let offset mortgage

  • You can build equity faster. Unless you opt for a capital repayment mortgage, you would ordinarily rely on overpayments or price growth to build equity. By reducing your outstanding debt, a buy-to-let offset mortgage allows you to augment your equity growth and repay your loan sooner.
  • Your savings will remain accessible. You can see that an offset facility works in a similar way to overpayments. Unlike overpayments, though, the savings that you offset against your mortgage interest remain accessible at any time. Overpayments are tied up in equity and much more difficult to re-borrow if needed.
  • You will save on mortgage interest. The capital excess from your repayments reduces your debt. The less you owe to your lender, the less interest you pay. By reducing your interest bill in this way, you may be able to gain more from your cash savings than you would by earning interest on them.

Are there many buy-to-let offset mortgages available?

At present, few lenders are offering buy-to-let mortgages with offset facilities.

Buy-to-let landlords are likely to need to access their savings more frequently than homeowners. They may need to fund a repair or an improvement. They may wish to expand their portfolio, or they might experience a void period or rental arrears. Without a large sum in savings, the interest benefit of a buy-to-let offset mortgage might be negligible.

Furthermore, buy-to-let interest payments are a tax-deductible expense for landlords. Capital repayments are not. The added tax payable may outweigh the interest you save by decreasing your mortgage balance.

Because of the scarcity of buy-to-let offset mortgages, the interest rates and fees available to you may be higher than for a traditional mortgage. You may need to talk to your advisor to determine whether the benefit of offsetting savings will outweigh the benefit of opting for a cheaper loan.

For these reasons, buy-to-let offset mortgages are something of a niche product.

This may change in the near future

Legislation taking effect between April 2017 and April 2021 will change the way landlords calculate their tax. The government will restrict the tax relief available to landlords and as a result, large interest repayments may no longer be as tax-efficient.

Buy-to-let lenders are responsive to the needs of the market. When the tax changes take effect, demand among landlords for features such as offset facilities may increase. It is quite possible that more lenders will begin to offer this.

If so, landlords will benefit from a greater selection of offset products with more competitive rates and fees. These products may offer more options, such as the ability to reduce your monthly repayments rather than the outstanding debt.

Enquire about a buy-to-let offset mortgage

Whether a buy-to-let offset mortgage is right for you will depend on your personal circumstances and plans for your investment. To discuss your options with one of our advisors, call us on the number above or click the button below to enquire today.

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This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.