Buy to Let Offset Mortgage

Podcast approved by The Openwork Partnership on 11/7/2024. 

Can you have an offset mortgage on Buy to Let? How do these work?

You can do it, although it does limit the number of lenders you can look at – because not all of them will offer you a Buy to Let offset mortgage. 

To explain how it works, for example, let’s say you’ve got a mortgage of £200,000 and also £100,000 in savings. You can put the £100,000 in a savings account with your lender and then you’d only be charged interest on the difference between your mortgage balance and your savings amount. In this example, you’d be charged interest just on the £100,000 difference.

What types of Buy to Let offset mortgages are there?

A Buy to Let offset mortgage is very similar to a standard Buy to Let mortgage in that you can choose a repayment or an interest only mortgage. You can choose a two, three or five year fixed rate or tracker mortgage. 

All the options are the same on a Buy to Let offset mortgage. The only difference is that you can use your pot of savings to offset the interest rates you’re charged.

Who is eligible for a Buy to Let offset mortgage? 

Any landlord, really. The criteria are still very much the same as a standard Buy to Let mortgage. A lot of lenders will want you to own your own residential property. You still need to have a 25% deposit to put down and the rental income and rental coverage is going to be calculated the same way. 

People that may potentially benefit from this are those who have large lump sums of money. If you’ve got £150,000 in an account that you’re doing nothing with, and especially if you’re only getting a low savings rate of perhaps 3.5% or 4%, you could get a better return with an offset mortgage. 

Mortgage interest is usually 5%, so you will benefit from saving on that interest. Some lenders still allow instant access to those funds. So you might lock it up, have your cake and eat it, with cheaper interest and lower payments. And if you do need to draw the money down, some are flexible arrangements where you can access the money whenever you want to.

What are the requirements for a Buy to Let offset mortgage?

You need at least a 25% deposit to put down. The lower the loan to value, the cheaper the rates. Some lenders may open the doorway to other products if you have perhaps a 60% loan to value. 

The requirements are often lender specific. For a lender that wants good credit, you need good credit. Some speciality lenders won’t mind a few missed payments, though. 

The only slight difference is that because of the specialism of the product, interest rates can be slightly higher. Offset mortgages can be slightly more expensive than standard products.

How can an offset mortgage help me save money? How much could I save? 

It’s hard to work out the exact amount you would save because it depends how much money you’ve got to offset your mortgage balance. 

But if you’ve got a £200,000 mortgage and £100,000 in savings, you will only be charged interest on the £100,000 difference between them. Based on that, the interest that you’d be paying will be cut in half.

That can potentially make your cash flow better when renting a property, because your interest payments are slightly lower. On the flip side, you could potentially choose to use that £100,000 to buy additional properties and rent them out – which could give you a better return. 

So it’s worth assessing it all as a whole – does an offset mortgage work for you or is it better to scale your portfolio up and buy further properties.