Should landlords turn to offset mortgages?

published 21 April 2017

Could an offset mortgage be the solution for beleaguered landlords looking to boost their cash flow? Family Building Society, a relatively new Epsom-based lender, reckons it is. The society has launched a new buy-to-let offset product to help landlords make better use of their savings.

Offset mortgages offer greater flexibility, because they link your savings to your mortgage, reducing the balance on which mortgage interest is charged. For example, if you had a £100,000 mortgage and £20,000 in savings, you would only pay interest on £80,000. The Family Building Society product gives landlords the option to use the interest saved on the offset amount to pay off the balance faster or to cut the size of their monthly payment.

"The effect of this, other aspects being unchanged, is to increase the profit from letting and increase the landlord's overall net cash flow," says Keith Barber of Family Building Society. "This may be particularly important for retired investors relying on letting as part of their retirement income, for example. It's also an ideal way for landlords to benefit from the regular sums they put aside for maintenance and improvements, or the tax to be paid on their letting income something to be welcomed in this historically low-interest period."

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"The 2.99% rate is not bad in itself, but it is discounted," says Jonathan Harris, director of mortgage broker Anderson Harris. "[This is not great], as it is linked to the lender's SVR rather than the base rate, so is set at the lender's discretion. This means that even if interest rates don't rise, the rate on the mortgage could. After two years at the discounted rate, the deal reverts to the SVR, which is currently a rather high 5.29%. It might be even higher at that time."

Other lenders also offer offset buy-to-let mortgages. Hinckley and Rugby Building Society has a "lifetime discount deal", with an initial rate of 2.89%. Clydesdale Bank's product less competitive, with a rate of 5.1%, but has a maximum loan-to-value of 80%. "Offsets tend to be priced higher than standard deals, so, unless you have considerable savings to offset so can effectively bring the rate down you might be better off going for a standard deal," says Harris. "Virgin Money has a two-year fix pegged at 1.54% with £1,995 fee, with the added advantage of the rate being fixed."

For owner-occupiers, offset mortgages have made sense if you have a significant amount of savings and pay more in mortgage interest than you would earn in interest if you put the money in a savings account. However, the introduction of the personal savings allowance (PSA) which allows basic-rate taxpayers to earn up to £1,000 per year and higher-rate taxpayers £500 in savings, income-tax-free could trigger the need for a rethink. Because your savings now attract less tax elsewhere, they may not be so effectively used to reduce mortgage costs. An offset mortgage was also previously a way for higher-rate taxpayers to avoid the hassle of having to declare interest earnings, but the majority of those won't have to do this now the PSA has been introduced.

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Emma Lunn is a multi-award-winning journalist who specialises in personal finance and consumer issues. With more than 18 years’ experience in personal finance, Emma has covered topics including mortgages, first-time buyers, leasehold, banking, debt, budgeting, broadband, energy, pensions and investments. Emma’s one of the most prolific freelance personal finance journalists with a back catalogue of work in newspapers such as The Guardian, The Independent, The Daily Telegraph, the Mail on Sunday and the Mirror. As a freelancer she has also completed various in-house contracts at The Guardian, The Independent, Mortgage Solutions, Orange and Moneywise.

She also writes regularly for specialist magazines and websites such as Property Hub, Mortgage Strategy and YourMoney.com. She’s particularly proud of her work writing about the leasehold sector and a Guardian front-page story about a dodgy landlord. She has a real passion for helping people learn about money – especially when many people are struggling to get by in today’s challenging economic climate – and prides herself on simplifying complex subjects.