Family Offset Mortgage

An offset mortgage is a type of home loan where you deposit savings into a bank account linked to the mortgage. These savings are then deducted from the outstanding mortgage value. Interest is then charged on this reduced amount rather than the total outstanding mortgage amount, resulting in you paying less interest in the form of lower monthly interest payments (payment reduction offset).

While it's most common that the savings will be deposited into a linked account by a parent, family offset mortgages can be arranged with other members of the family too. Some lenders have wider definitions of who might constitute a family member.

With a family offset mortgage, the savings account – sometimes referred to as an “offset account” – is held in the name of the mortgage owner and not the family member providing the savings. The family member’s savings may be locked into the savings account for a set amount time as determined by the lender. The family member will however have their savings returned to them once certain criteria have been met – e.g.  once 25% – 30% of the mortgage has been paid off.

Instead of a family member depositing savings into a linked account with the lender, some lenders will put a charge on the family member’s property – or even allow a mixture of the 2 options. This charge would act as equally suitable security as the savings and would reduce the mortgage interest in the same way. The family member won’t make payments towards this charge and will have the charge removed once certain criteria has been met – e.g. once 25% - 30% of the mortgage has been paid off.

Offset mortgages are a great way for parents to help their children onto the property ladder.

Essentially, the more you have in a linked savings account, the less interest you’ll pay on your mortgage. Some lenders – such as the Family Building Society – allow more than one family member to deposit their savings into the buyer’s linked savings account. This means you can offset even more of your mortgage, up to 100% of the mortgage amount. At this level, it would mean you wouldn’t be charged interest on the loan at all.

Bear in mind that while offset mortgages reduce the amount on which you pay interest, they do not reduce the size of the loan itself, which will still need to be repaid in full. Offset mortgages can also be subject to slightly higher interest rates than standard repayment mortgages, which may temper the benefits of taking the offsetting route.

An alternative option would be for your parents to gift you some or all their savings for a deposit. Providing a larger deposit via gifted money could give you access to lower interest rates, so what works out better for you will depend on your situation – your mortgage adviser can help you figure out the best option.

Your parents could also potentially lend you money for a deposit, however the lender would want to know the details of the repayment plan between you and your parents and this could potentially affect how much you could borrow.

If you’re not sure if a family offset is the right route for you speak to one of our advisers on 0330 433 2927 as they’ll help you figure out the best option for your circumstances.

Anyone can apply for a family offset mortgage. However, different lenders have a range of criteria regarding who can provide offsetting savings. For instance, Barclays and Nationwide do not allow anyone who is not a legal relative to be involved, whereas other lenders are more flexible and will allow a friend’s savings to offset a mortgage.

As with other mortgage types, lenders have their ways of assessing risk amongst applicants. If the person applying has a poor credit rating or they are planning to buy a non-standard property, the lender may consider this to be a higher risk transaction. In these situations, the buyer may have a smaller selection of family offset mortgage options.

Family offset mortgages are typically only available as repayment mortgages. This is because not many lenders offer family offsets, or offsets in general, so the options can be limited.

With a repayment mortgage you make monthly payments which comprises both a portion of the capital loan amount and interest amount. This means that every month, you pay off a bit of the amount you borrowed. Typically, once you’ve paid off a certain amount, your family member will have access to their savings in the linked account.

If you fail to make the payments on your family offset mortgage, the lender can retain the family savings, usually until they receive payment. If the property is repossessed, some of the savings may be used to pay off the outstanding mortgage balance.

While there are considerable benefits to taking out a family offset mortgage, there are also some risks associated with them:

• Reliance on family members - due to the nature of this type of mortgage you’re reliant on your relatives to contribute their savings towards offsetting the interest. If your relative experiences financial issues they won’t be able to access their savings until certain lender criteria are met
• Family conflict - if there are any disagreements within the family regarding the mortgage or managing the offset account, this could put the mortgage arrangement at risk
• Insufficient savings - a family offset mortgage is dependent on having adequate savings to offset the interest. If your relative’s savings are not sufficient, they won’t make a significant impact on the mortgage interest
• No access to savings - when a family member’s savings are used to offset the mortgage, they become inaccessible until certain criteria is met, for example, until the borrower has paid off a certain amount of the mortgage. This means that your relative can no longer use these funds, even for emergencies.
• Limited options - not all lenders offer family offset mortgage products, which will inevitably limit your choice, meaning you might miss out on more competitive mortgage deals elsewhere
• Higher rates - offset mortgages can come with higher rates so it’s worth speaking to a mortgage broker to see if you can find a cheaper solution

While it’s good to be as informed as you can by doing your own research online, family offset mortgages are a special class of product which demands support from a mortgage adviser with access to products from across the entire market.

Rather than relying on online research or popping into a high street lender, the best route to getting a competitive family offset mortgage deal is by contacting a broker with specialist knowledge of this mortgage type. At John Charcol, we have a comprehensive view of which lenders offer the best family offset deals and can guide you through each step of the mortgage application process.

There are only a couple of family offset mortgage providers at present such as The Family Building Society. The Family Building Society has 2 options for family offset mortgages – payment reduction offset and term reduction offset. The mortgage term reduction option may mean you can pay off your mortgage years earlier.

Fortunately, there are alternative schemes to family offset mortgages that function in similar ways and can let you borrow up to 100%, such as Barclays' Family Springboard, Halifax's Family Boost and Nationwide's Family Deposit.