Offset Buy-To-Let Mortgages Explained

If you're a Landlord, an offset buy-to-let mortgage could reduce your monthly interest payments and increase your profits. Find out what the best rates are and how they work.

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Home Buy To Let Mortgages Offset Buy-To-Let Mortgages Explained
Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Jon Nixon

Reviewer: Jon Nixon

Director of Distribution

Updated: March 15, 2024

How we reviewed this article:

Our experts continuously monitor changes in the financial space and work closely with qualified mortgage advisors for factual verification.

March 15, 2024

Being a landlord can be a great way to earn regular income whilst investing for the future, but there are a lot of costs attached as well – mortgage repayments, maintenance costs and tax to name a few.

In the article we’ll look at how an offset buy-to-let mortgage could reduce your monthly interest payments and increase your profits, what rates you can expect and why you’ll get a better deal with a specialist broker.

What is a buy-to-let offset mortgage and how do they work?

A buy-to-let offset mortgage works like any other buy-to-let mortgage, but it also allows you to offset any savings against the outstanding loan amount so that you only pay interest on the balance. For example, if you have a £300,000 buy-to-let mortgage and savings of £50,000, you would only pay interest as if you had £250,000 outstanding.

You can use this saving either to reduce your monthly repayments – often a good option for landlords wanting to increase monthly profits – or you can maintain the same monthly payments, repaying more of the capital instead, and reduce the overall term of your mortgage.

A buy-to-let offset mortgage is also a good way of easing the impact of the recent tax changes, whereby you can no longer deduct your interest payments when declaring your annual rental income.

It’s important to note too that while your savings are offset against your mortgage they won’t earn you any interest.

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Eligibility criteria

For offset BTL mortgages specifically, your savings will usually need to be held with your mortgage provider. You may be able to link more than one savings account, including ISAs, business accounts and personal accounts. Some lenders will also allow you to link and offset both business and personal current accounts.

In addition, similar rules apply for offset buy-to-let (BTL) mortgages as the eligibility criteria for a standard buy-to-let, so expect lenders to also look at:

  • Deposit Most BTL lenders will look for a maximum LTV of 75%, which is lower than for residential mortgages. The lower the LTV, the better the rates you may be able to negotiate. Many BTL lenders will have one rate for LTVs around 65-75% and another lower rate for LTVs of 60% or below.
  • Projected rental income – Your personal income from employment is less important with an offset buy-to-let mortgage, but lenders still want to be sure you can afford the repayments, so they’ll want to know that your projected rental income is enough to cover the mortgage. They will normally require rental income to be a minimum of 125% of your repayments.
  • Credit record – If you have any issues such as defaults or IVAs on your credit file then this could impact which lenders are prepared to consider you for an offset BTL mortgage as well as the rates they will offer. It’s not a deal breaker though – a specialist bad credit buy-to-let broker will be able to help if previous credit problems are an issue for you.

Some lenders will also take into account your experience as a landlord and how many other properties you already rent out.

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How to get an offset buy-to-let mortgage

Before you launch into the mortgage application process, there are a few steps to take first to make sure you’re in the best possible position to proceed.

Find a specialist buy-to-let broker

While an offset buy-to-let mortgage can be a flexible way to bring down your monthly mortgage interest payments, they aren’t for everyone, and it’s important to talk through your situation with an experienced buy-to-let mortgage broker. If you decide it’s the right option, they’ll be able to help you get your paperwork together and secure you the best deals. Offset buy-to-let mortgages are still relatively new and not as easy to find as a standard BTL mortgage, so you’ll need a specialist broker with existing relationships with niche BTL lenders.

Tell us a bit about your situation in our quick online form and we can put you in touch with a broker who will be able to help.

Assess the pros and cons

These mortgages can potentially save you a lot of money as a landlord if you have a large amount of savings, and the flexibility to withdraw from or add to savings over the course of the loan is a definite plus. There are disadvantages to an offset mortgage too though, such as the restriction on having to hold your savings with the same lender and the potential to have to pay more should you need to use your savings in the future.

Offset BTL mortgages are normally slightly more expensive too, and it could be that simply doing a buy-to-let remortgage to a cheaper deal could be a more reliable and affordable alternative. Your broker will be able to help you with these comparison calculations based on the rates available from a selection of lenders.

Check your credit file

Your credit record can impact your ability to get an offset buy-to-let mortgage and so it’s important to have an up to date picture of the information credit agencies hold about you, even if it’s just to check for inaccuracies. Share information from your credit file with your broker and if there are any issues they will be able to assess these and look at specialist bad credit buy-to-let mortgage lenders if necessary.

How much could you save?

Try our repayments calculator below to find out how much you could save on your buy-to-let mortgage payments by offsetting a savings account.

calculator icon

Offset Mortgage Calculator

This calculator shows you how your mortgage payments could look if you choose an offset mortgage and how much you could potentially save with this product type.

The total amount you're borrowing
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Enter the mortgage rate, 5.5% is a typical rate currently but this can vary
%
Enter the mortgage term, 25 years is the average but lenders can offer shorter and longer terms
years
Enter an amount in pound sterling
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Savings amount must be less than the loan amount

Without offset savings:

Monthly repayments:

Total cost:

With offset savings:

Monthly repayments:

Total cost:

Now that you have a rough idea of how much you could save on interest by offsetting your mortgage, you should speak to a specialist broker for bespoke advice about offset mortgages and access to the best deals that you qualify for.

Which lenders offer them?

While a good number of lenders are now offering residential offset mortgages, there are far fewer with offset buy-to-let products. Most are specialist lenders who can be difficult to access without a broker, and many will have specific conditions attached to the mortgage.

  • The Family Building Society has an offset BTL mortgage with varying introductory rates depending on LTV – having a 40% deposit rather than a 30% deposit will save you money with this one.
  • Clydesdale Bank has a flexible offset BTL mortgage that allows you to open and offset up to six different business or personal current or savings accounts, but they require you to maintain monthly repayments at the contracted amount. This means that while you will save on interest, you’ll overpay on the capital part of the loan to make up the difference, shortening the overall term. This might not be as attractive an offer for landlords looking to increase profits on a monthly basis.

What interest rate to expect

Because there are so few lenders offering offset BTL mortgages and they come with a lot of flexibility, you may find that interest rates are higher compared to a standard BTL mortgage. The best rate on an offset BTL from The Family Building Society for example is currently a two-year discounted rate of 3.89%, moving to a current follow-on rate of 6.29%, with £999 in product fees.

A standard BTL from The Principality by comparison currently has an initial two year rate of 2.60% moving to a variable rate of 4.65% and with no product fees. That’s not to say an offset mortgage won’t work out cheaper, it just depends on how much you have in savings and whether you’ll need to access them in the future.

What rental yield to expect

Rental yields are the amount of cash your property generates, calculated as a percentage of its value, and broken down into net and gross values. 8% is generally regarded as a ‘good’ gross rental yield for a buy-to-let investment property. To calculate your rental yield, simply use our calculator below:

Rental Yield Calculator

This calculator will show you the rental yield on your buy-to-let property using either the original purchase price, plus associated costs, or the current value. All you need to do is choose which option you want to base your calculation on and your monthly rental premiums.

Input either the original property purchase price or current value to work out the rental yield.
£


£

Gross Rental Yield:

Net Rental Yield:

Now you've worked out what your current rental yield is, why not speak to a broker to see what buy-to-let mortgage/remortgage opportunities are available? With their expertise in this market they'll be able to identify a range of new deals which could reduce your mortgage payments and, as a result, improve your overall rental yield.

Get matched with a buy-to-let mortgage broker

If reading this you think that an offset buy-to-let mortgage could be for you, then it’s time to find yourself a broker. Rather than wasting valuable time doing the research yourself, our broker matching service does the hard work for you, looking at your personal circumstances and matching you with a pre-vetted broker who has specific experience in offset BTL mortgages.

Our service is completely free of charge, with no obligation, so give us a call now on 0808 189 2301 or make an online enquiry and let us take the stress out of finding the right broker.

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FAQs

Not any more. Landlords used to be able to deduct their mortgage interest payments from rental income and only pay tax on the profits, but this changed a few years ago. Now landlords pay tax on their total annual income and can only claim tax relief at the basic 20% level, however much tax they pay. An offset buy-to-let mortgage is an alternative way to try and reduce costs and increase profits after tax.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

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