Mortgage Reserve Accounts Explained

Mortgage reserve accounts are a form of offset mortgage product. They’re not particularly common anymore, but some lenders still offer them. Here, we look at what they are, how they work and why you may want one.

We also investigate what to do if you believe you were mis-sold this type of product and how you can pay off this form of loan.

What is a mortgage reserve account, and how does it work?

A mortgage reserve account is where your provider deposits part of your mortgage, and the other part is used to fund your property purchase as usual.

The money in the reserve account can be used by you when you need it – without needing to apply for another loan or a larger mortgage amount. When you use money from the reserve account, you are essentially borrowing against equity in your home. It’s, effectively, like having a secured overdraft facility.

Importantly, the reserve portion does not require any repayments until the end of the loan term – as the conventional part of your mortgage will do. Your funds will only accrue interest once you have withdrawn them.

The amount you can borrow for your reserve will be determined by the loan-to-value (LTV). Your overall borrowing amount will be limited to the maximum LTV, typically around 75%, but your specific provider will decide this based on the strength of your application.

What are the benefits of having one?

While these reserves may not be necessary or even suitable for everyone, they do come with the following benefits:

• Flexibility: Being able to borrow as and when you need it can be a big advantage, especially if you are not sure how much or when you may need to access cash.
• It is cost-effective: The amount held in reserve is not charged interest until you withdraw it from the account.
• Fast finance: If you are in need of borrowing more money, perhaps to extend your home or pay for renovations, you do not have to go through a long process of applying for more funds from your mortgage provider. Instead, the money is readily available for you.
• Emergency fund: While many people build an emergency fund by saving money from their income, having a mortgage reserve is another way to build a financial buffer.

Things to consider

These benefits can look compelling. However, do bear the following disadvantages in mind:

• Higher rates: To compensate lenders for the account’s flexibility, these products cost more through higher interest rates.
• Early repayment charges: Some of the terms and conditions attached to your account may mean you incur early repayment charges if you want to pay off your reserve before the end of your term. Early repayment charges could also be high on the remaining mortgage amount.
• Limited providers: Few providers offer them, which is currently making it difficult to access.

How a broker can help with mortgage reserve accounts

Successfully applying for these types of mortgages can be complex, plus they’re not very common either. By asking for a specialised broker’s advice, you can identify the right lender offering the most favourable terms.

As a result, they can save you a great deal of money, not to mention time and stress, by guiding you through the entire application process. If you get in touch, we’ll arrange for a broker we work with who has experience in this area to contact you directly.

Paying off your reserve

How and when you pay off your reserve depends entirely on the terms attached to your mortgage agreement. Each provider will have different conditions stipulating how, when, and how much you repay.

For instance, some providers may allow you to repay your loan early with overpayments – often around 10% of the outstanding amount per year. On the other hand, some may charge high early repayment fees if you try to pay it off before the end of the term.

Eligibility requirements

The eligibility criteria for these products will be very similar to those required for a conventional mortgage. The more criteria you meet, the stronger your application will be, giving you a better chance of qualifying for the best rate offers available.

Each provider will have a different approach to eligibility requirements. However, generally speaking, they will be:

Income and income source

The more you earn, the more you can usually borrow. However, some lenders will not accept certain income sources (such as bonuses and commissions) as part of their affordability assessment.

Deposit and LTV Ratio

Usually, the minimum you can put down is 25%, though some lenders may only need 10%.  When it comes to mortgage reserve accounts, you need to hold more equity in your home than the maximum borrowing level.

Credit

Mortgage lenders like to see clean credit histories as it lowers their perceived risk of lending to you. When it comes to mortgage reserves, that is particularly important. They want to be confident that you can repay the entire loan and would not use the reserve inappropriately, making it more difficult to repay.

Other mortgages

Your mortgage may have to be a first-charge loan, and your primary residence for a reserve account.

Age

Most mortgage lenders cap an applicant’s age at 75, though some may go as high as 80 if not 85.

Which lenders offer these products?

These products are increasingly rare. Few high street lenders now offer them. Barclays, for example, no longer accept applications. As a result, speaking with one of the brokers we work with can be extremely useful. They will help identify your specific options from the specialist lenders that do offer them.

What to do if you think you were mis-sold one

If you think you have been sold a mortgage reserve account with erroneous or inappropriate information, you may be able to claim compensation. To do so, there are a few steps that you should take to ensure your concerns are addressed.

• Compile all pertinent information: Write down key dates and gather any documentation from when you applied and signed up for the mortgage reserve product.
• Lodge a complaint with your provider: Go through your provider’s complaints process via their website. Follow the steps on how to contact them with your concerns. They have eight weeks to respond to you.
• Contact the Financial Ombudsman: You can contact the Financial Ombudsman if the provider does not reply within eight weeks. You can also contact the ombudsman if you do not think the response is reasonable.

There are a couple of things to be aware of before lodging a complaint. Firstly, the Financial Ombudsman Service can only look into complaints regarding a mis-sold mortgage reserve within six years of when that product was first sold. Secondly, if you do get a response from your provider with regard to your complaint, you have six months to contact the Financial Ombudsman Service if you are unhappy with the response you received.

Get matched with a mortgage reserves specialist.

Mortgage reserve accounts are difficult to come by. However, they can be useful for the right applicant and situation. Using a specialist broker can prove invaluable in improving your chances of not only finding a mortgage reserve provider but also being approved for this product. Their whole-of-market knowledge means they can suggest your best action and which lenders to approach.

Use our free, no-obligation broker matching service to connect you with an expert who can help advise you on your specific situation. Call us on 0330 818 7026 or make an enquiry so we can put you in touch with an expert today.