Family Offset Mortgages

If you’re looking to buy a home but don’t have a deposit saved, family offset mortgages, otherwise known as parent offset mortgages, offer a potential solution. Allowing relatives to support you in your application can speed up your path to home ownership and decrease the stress, but how do they work?

The guide below explains how a family offset mortgage operates, where to find the best rates and the benefits of pursuing this type of mortgage.

How do family offset mortgages work?

This is where a buyer’s family member/s puts up their savings, usually in place of a deposit, to offset against a mortgage. After being transferred into an account linked to the mortgage, the lender deducts the savings from the loan, thus reducing the capital that needs to be borrowed.

For example, if a borrower requires a £250,000 mortgage but a family member has £50,000 in a savings account, this could be linked to a mortgage account, reducing the loan needed to £200,000. Interest would only be paid on the £200,000, rather than the full amount.

Once the borrower has repaid around 25% to 30% of the mortgage, usually within an agreed timeframe – 5 years is the norm – the savings are transferred back to the relative.

Popular among first-time buyers, this product provides those without a sizable down payment or access to a government scheme, an alternative way of getting onto the property ladder. For the lender, it offers security should the borrower be unable to repay the loan.

Work Out How Much Interest You Can Save

You can use our calculator below, based on your own specific circumstances, to see how much interest can be saved using a family offset mortgage:

Who is eligible?

As with any mortgage, a lender judges eligibility on creditworthiness – something a broker would be able to independently advise on ahead of an application submission. That means looking at a borrower’s earnings and what they’re left with at the end of the month to determine whether they can afford the repayments. They’ll consider any outstanding debt, look at credit history and ask whether the property is of non-standard construction, among other assessments.

Specific to this type of loan, a lender will also consider:

• The family member/s in question: Often it’s parents who use this model to support their children, but certain mortgage providers allow other relatives to put their savings forward. For example, Nationwide will only consider legal relatives but Barclays has more flexibility.
• The savings available: Most lenders will require 10% to 20% of the property’s value to be in the savings account. However, certain lenders make it a general rule that there be at least £50,000 in the account. Alternatively they might require the family member to be earning upward of £75,000 annum.
• Any deposit available: A deposit can be used in addition to the savings. This would contribute to lowering the loan to value (LTV) ratio, leading to a lower interest rate.

Repayment options

Depending on how you choose to pay back the loan, you can:

• Shorten your mortgage term: In this scenario, the lower interest rate you’re able to access through this mortgage means a bigger percentage of your monthly repayments can go toward paying off the loan. That means you’re likely to pay it back at a quicker rate, reducing your mortgage term.

OR:

• Lower monthly repayments: Another option is to use the savings to reduce your monthly repayments. The mortgage term will remain the same but you’ll be spending less each month.

To determine which payment model might work best, you could use a family offset mortgage calculator. Most lenders offer these to give you an idea of what your monthly repayments could look like but it’s always best to verify these estimates with a broker who can take a full picture view of your finances and lay out what’s realistic for you.

What happens if you default on the repayments?

If the homeowner fails to make the repayments, the lender will hold onto the family savings for longer than agreed, usually until the issue has been resolved. If it gets to the point where the property must be repossessed, some of the savings could be used to pay off the remaining balance on the mortgage. Throughout this process, both parties will need legal advice from different solicitors and having a broker could help in answering any procedural questions.

How an offset mortgage broker can help

Buying a home for the first time is a complex process. Add to that the extra paperwork and elements of family savings and expectations and working with a specialist family offset mortgage advisor is essential. They’ll coordinate all elements of an application and ensure the best deal both for yourself and your family while improving your chances of mortgage approval. Additionally, they can:

1. Assess your financial situation and determine whether a family offset mortgage is the smartest way forward for you.
2. Advise on which repayment model will work best in your situation.
3. Tap into their lender database to find one likely to offer you the lowest rate and best terms so you can have your family’s savings returned to them as soon as possible.

The benefits of a family offset mortgage

Although this can seem like a risky arrangement – especially for the family member who is trusting the borrower to be able to repay the loan – there are multiple benefits to pursuing this type of mortgage.

• It allows for earlier home ownership – It can take a long time for a first-time buyer to save a deposit. Having family savings as an alternative allows for a quicker entrance into the property market.
• It has the potential to reduce repayments – Having a significant amount of money to be able to offset the loan can mean smaller, more affordable repayments. Applying to borrow a smaller amount also means you’ve got a lower LTV ratio and are therefore less risky to a lender who in turn will lower the interest rate.
• It enables family members to help without it costing them – Family members are able to help a first-time buyer make that all important first purchase, in theory without having to lose any money.

The table below provides a quick summary of the advantages and disadvantages of family offset mortgages.

The lending market

The market for family offset mortgages is smaller than that of conventional mortgages but some  high street mortgage providers do offer them, subject to availability. They include…

• The Post Office offers the family link mortgage with a 90% LTV
• Halifax has a family boost mortgage which holds the savings for 3 years rather than 5
• Nationwide has a family deposit mortgage that allows the family member to use equity in their home rather than savings. They would however have to already have their mortgage with Nationwide.

Alternatively, there are specialist lenders – such as The Family Building Society –  that could offer more flexible arrangements and take into consideration any extra factors such as self-employment or bad credit.

The only way to know which will offer the best deal based on your circumstances is by working with an advisor who has a history of securing family offset mortgages.

Available rates

Interest rates will vary depending on the lender but are typically slightly higher than that of a conventional mortgage, lying between 2% and 4%. Right now, Barclays is offering 3.5% on a five year fixed rate with a 95% LTV and The Tipton & Coseley Building Society is offering 3.64%.

Get matched with a family-offset mortgage broker

With a few more factors – and family members – involved in such a mortgage, having tailored and timely support is invaluable. A broker who specialises in this niche form of borrowing can help refine your search for the ideal family-offset mortgage whilst also supporting your application as a first-time buyer and answering any questions you or your family may have.

The brokers we work with are experts in their field and many of them arrange family offset mortgages on a regular basis. They are focussed on creating as smooth a home ownership journey as possible.

Reach out today via 0808 189 2301 or our enquiry form to be connected to an expert ideal for you and enjoy a free, no-obligation consultation to kick things off.