"The benefit of an offset mortgage is that they can arrange the amount they would like to borrow, but only pay the cost of the interest when they need the money."
Many property investors start the growth of a portfolio by using the equity they have built up in their own home.
For example, if they have a residential property with a value of £300,000 and currently only have a mortgage of £100,000, they could borrow more to cover the costs of property investment, subject to being able to afford the payments.
While evaluating their choices on how to borrow the money, you should ensure that you are considering and discussing with them the option of an offset mortgage as is a very flexible option for landlords.
The benefit of an offset mortgage is that they can arrange the amount they would like to borrow, but only pay the cost of the interest when they need the money.
So, for example, if the person in the above scenario arranges a loan of up to 75% of the property value of £300,000, then, 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 other properties. Any properties purchased will likely be 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.
On day one, the full £125,000 (in this example) is borrowed. Depending on the lender, an offset mortgage usually comes packaged with at least a savings account and sometimes also a current account, so on day two, the borrower will transfer any sums they do not need into one of these accounts so no interest is charged on it.
As well as the money not costing anything until it is used, the other advantage is that it is pre-approved, ready and waiting; as soon as the money is required as it will just need to be withdrawn from the savings or current account.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.
As another option, if the funds are used in their entirety to purchase a property outright, the landlord will be deemed an attractive cash buyer in the seller’s eyes.
If the landlord selects a lender with a current account option, they could look to have rents and tenant deposits also paid into this account which will also be offsetting the residential mortgage costs for a short time, until the buy-to-let mortgage payments need to be made in that month.
Another benefit is that the traditional cost of mortgage interest when funds are secured on your client’s own home is cheaper than the cost of interest when funds are secured on an investment property. 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 their home if things go wrong, for example, if they have a tenant who does not pay the rent or damages the property.
Property investors looking to raise money on their residential dwelling should ensure they have sufficient income to be able to afford the monthly payments, independently of their buy-to-let portfolio. They also should hold sufficient capital reserves to fund any buy-to-let mortgage payments for some time if things do not go to plan, to make sure they are not at risk of losing their home.
If that is all given due consideration and put in place, then an offset mortgage is certainly one of the more flexible and cost-effective options of funding for property investors.
