Offset - Flexible finance for landlords

Liz Syms - Connect for Intermediaries
11th July 2019
Liz Syms 333

If you are looking to start or grow a property portfolio, even with a mortgage, you will need some money upfront for a deposit and costs.

Many property investors start the growth of a portfolio by using the equity they have built up in their own home.

If you own a property, for example, with a value of £300,000 and currently only have a mortgage of £100,000, you could borrow more to cover the costs of property investment, subject to being able to afford the payments.

There are, however, several choices on how you can borrow the money and one in particular called an ‘Offset Mortgage’ is a very flexible option for landlords.

The benefit of an Offset Mortgage is that you can arrange an amount you would like to borrow, but only pay the cost of the interest when you need the money.

So, for example, if the person in the above scenario arranges a loan up to 75% of the property value of £300,000, after repaying their existing lender, they will be left with £125,000 to invest in property. Depending on the value of the properties the investor is looking to purchase, the £125,000 may be sufficient to cover the deposit and costs for two to three properties.

However, the properties will likely be purchased one at a time rather than all together, so if say £50,000 were needed for the first purchase, with an Offset mortgage, interest would only be effectively payable on this sum rather than the whole £125,000.

How it works is that on day one, the full £125,000 (in this example) is borrowed. Offset mortgages usually come packaged with at least a savings account and sometimes also a current account, depending on the lender. On day two, the borrower will transfer any sums they do not need into the savings or current account.

While it is in these accounts, it will automatically earn the same amount of interest as the interest for the mortgage, effectively ‘offsetting’ the cost.

As well as the money not costing anything until it is used, the other advantage is that it is pre-approved and ready and waiting as soon as the money is required as it will just need to be withdrawn from the savings or current account.

This makes it a great product for investors to also take advantage of better properties for a quick purchase such as at auctions. If the funds are used in their entirety to purchase a property outright, they will be deemed an attractive cash buyer in the seller’s eyes.

Another benefit is that the traditional cost of mortgage interest, when funds are secured on your own home, is cheaper than the cost of interest when funds are secured on an investment property. So, any borrowing that can be arranged on an applicant's own home will save them money in the long run.

It is worth considering however, that there is a risk to your own home if things go wrong, for example, if you have a tenant who does not pay the rent or damages the property. Property investors looking to raise money on their own residential dwelling should ensure they have sufficient income to be able to afford the monthly payments, independently of their buy-to-let portfolio.

They should also hold sufficient capital reserves to also fund any buy-to-let mortgage payments for a period of time if things do not go to plan, to make sure they are not at risk of losing their home.

If that is all put in place, then an offset mortgage is certainly one of the more flexible and cost-effective options of funding.

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