What do you think of when you hear mention of the term Bank of Mum and Dad? If your mind automatically wanders to those lucky souls who can hand over a massive lump sum to their kids without a thought, you’re not alone.
The reality, however, is quite different. BoMaD can actually come into play in a variety of ways. One such option available to parents looking to help their kids get onto the property ladder is a family offset mortgage, but what are they and how do they work?
All will be revealed in today’s post.
What is a family offset mortgage?
Family offset mortgages are a subset of a wider branch of mortgages that are, unsurprisingly, referred to as offset mortgages. They work in exactly the same way as a regular offset mortgage, but with one key difference: the mortgage holder doesn’t put their savings into a linked account, a family member does on their behalf.
How do family offset mortgages work?
Let’s expand a bit on the previous section. All offset mortgages, including family offset mortgages, work in the same way: savings are offset against the mortgage to reduce the loan amount, thus decreasing the amount of interest paid.
Say, for example, you have £25,000 savings and your child is looking to secure a £250,000 mortgage. You could put that £25k into an offset mortgage (family) in order to bring down the amount on which interest is payable, so £225,000 instead of the full £250,000. Over the course of a mortgage term, this could result in a substantial saving in the amount of interest your child will have to pay.
Some key points to bear in mind, though.
Firstly, the capital repayments on the property remain the same. What this means is that although you will be reducing the amount liable for interest, the loan still needs to be paid in full.
Second, it’s common practice for linked accounts - i.e. the account in which the offsetting savings are held - not to earn any interest. This makes number crunching essential before you decide to go down the family offset mortgage route. You may be better off making alternative arrangements, such as opening a savings account that pays a higher rate of interest instead.
Third, offset mortgages are often offered with marginally worse interest rates than standard mortgages (you didn’t think the banks would let you have it all your own way, did you?!). Again, this makes running the numbers vital, as you may end up being better off with a lower mortgage rate.
A lot will depend upon how much you have in savings, which brings us nicely to our next point…
What amount of savings do you need for a family offset mortgage?
This is one of those classic it depends moments. Much will depend on who the lender is, as each will have their own criteria for family offset mortgages.
A good rule of thumb, however, is that you’ll likely need at least 10% of the purchase price. So, to take our example above, a £250,000 property will likely demand £25k in savings, minimum.
That being said, some lenders will have far higher levels, especially the big high street names. You may, in some instances, even find additional stipulations, such as minimum annual income, applied to a few family offset mortgage products. Shopping around for the best loan is absolutely vital in this arena.
Who can apply for a family offset mortgage?
On top of the amount of savings required for a family offset mortgage, there are other hurdles to overcome. As with any loan, if the applicant is deemed to be high risk, the chances of a successful outcome narrows significantly.
High risk can take a number of forms, too. A poor credit history, high debt-to-income ratio, minimal deposit…all of these factors will be taken into account. Furthermore, the type of property you intend to buy will be looked at, too.
If the home itself is deemed to be ‘non-standard’, which could mean anything from a property with a thatched roof through to homes located in flood risk areas, you could find yourself with far fewer lenders to choose from.
Generally, however, the key attribute in the eyes of any lender is affordability. If you can prove to the mortgage provider that meeting your repayments won’t be an issue, it will usually come down to whether or not you meet with their own company policies on who they are willing to lend to.
Do all lenders offer family offset mortgages?
In short, no. Offset mortgages are complex, and very few lenders offer them. Virgin, HSBC, Halifax, and Nationwide are among the big names who don’t see any value in offering such a specialised product.
You’ll also find that the lenders who do offer them will try and jazz things up by renaming their products, so a family offset mortgage could be called something completely different.
If you really want to pursue a family offset mortgage (and you should continue reading until you make that decision), speak to a reputable mortgage broker. They will be able to decipher all the marketing jargon for you.
Family offset mortgages: Pros and cons
Now that we know a bit more about family offset mortgages and how they work, let’s take a broader look at the advantages and disadvantages of using this method to buy property:
- Reduction in the amount of interest paid.
- Flexibility between lower monthly repayments or shortening the duration of the mortgage.
- Overpayments are usually accepted with family offset mortgages (check terms for early repayment charges, though).
- An offset mortgage could be beneficial for higher-rate taxpayers.
- Savings remain accessible.
- No interest paid on savings.
- Interest rates are commonly higher on offset mortgages than standard repayment mortgages.
- Choice of lenders can be restrictive.
- Terms are generally unattractive.
- LTV ratios can be prohibitive.
- Not always the best option, especially for those with small savings.
So, should you consider taking out a family offset mortgage?
Before we go ahead and give you our opinion, it’s important for us to point out that it is just that: an opinion. We are not financial advisors, nor do we claim to be. If you are seriously considering a family offset mortgage, speak to a professional after you’ve finished reading this post.
With that little caveat out of the way, here’s how we see things.
There are very few products on the market at present, so competition in this region is minimal. What this generally translates to is unfavourable terms that are largely unattractive to the consumer.
On top of this, around 50% of first-time buyer transactions have already had some sort of assistance from the bank of mum and dad, by way of help with deposit and fees. Financing an offset mortgage as well is simply out of reach for most parents. Oh, and don’t forget that they are receiving 0% interest on their savings, too!
Then there’s the LTV ratio: there are no 95% offset mortgages available. At best, you’ll get one at 90% LTV, but the terms of these mortgages are deeply unattractive. For those looking at new build properties, the government's Help to Buy scheme is a better option by far.
How to find the best family offset mortgage
If you’re still thinking about taking this route, comparison websites offer consumers a quick and easy way to find different products from different lenders. Most will have a page listing the various family offset mortgages available, so these are a good place to start.
Remember, though, that some of these comparison websites are not as impartial as they’d like you to believe, so be sure to enter your details into a few different sites in order to receive the broadest range of products possible.
From here, we’d strongly recommend employing the services of a good mortgage broker. While it may seem like another unnecessary fee that you’d be better off avoiding, it really can prove to be a wise investment to make. Not only will they have immediate access to all lenders, big and small, many will also be able to negotiate preferential rates on your behalf.
Here at Petty’s, we recommend Clarity Financial Management, but by all means do your own research to find the best mortgage broker for your own individual needs and circumstances.
If you are looking to get on the property ladder as a first-time buyer or are considering moving for a second, third, or fourth time, speak to Petty’s. We have been operating locally since 1908, helping people just like you achieve their property goals with a minimal amount of fuss and interference.
We specialise in offering our clients a more personalised approach to buying, selling, renting, and letting property by combining traditional values with a state-of-the-art, data-driven approach to getting things done. You’ll never be a mere number here at Petty’s, so come and join the family by calling our friendly team of experts today.