A family offset mortgage is a type of mortgage that lets a family member help you buy your first home. Sometimes called a parent offset mortgage, it reduces the amount of interest you pay on your mortgage by linking your deal to a family member’s savings account.
Family offset mortgages make it easier for you to get on the housing ladder. But they might not be right for everyone. Here’s what you need to know.
How does a family offset mortgage work?
First, what exactly is an offset mortgage? It’s basically a type of mortgage that is linked to your savings. Whatever sum you have in a special linked savings account reduces the amount you borrow on your mortgage.
Let’s imagine a scenario:
- You’re after a mortgage of £200,000…
- And your linked savings account has £30,000…
- An offset mortgage offsets the amount you have to pay on your mortgage against what is in your savings account.
- So, you only have to pay interest on the remaining amount of £170,000 (£200k - £30k). This means lower monthly payments and possibly a reduced mortgage term!
In a family offset mortgage, a family member links their savings to your mortgage.
Typically, it’s because they’re your parent, but it could also be another member of your family. You get onto the housing ladder without your family member having to gift you the money for the deposit.
- Say you need a £200,000 mortgage
- Your parents put £50,000 in a savings account linked to the mortgage
- The amount you actually borrow is £150,000
Family offset mortgages work by lowering the loan-to-value (LTV) ratio—a measurement of how much you are borrowing compared to the value of the property. With LTVs, lower is always better in the eyes of mortgage lenders.
With a family offset mortgage, you are technically borrowing less, meaning your LTV is lower, making you a more attractive candidate.
Typically, a family offset mortgage will play out in one of two ways. It can give you either:
- A shorter mortgage term. Rather than paying a mortgage back over 30 years, an offset mortgage may mean you’ll pay it back over 25 years or something similar. That means you pay less interest over the long term—and your monthly payments pay back more money more quickly.
- Smaller monthly repayments. Rather than reducing the mortgage term, an offset mortgage can reduce the size of your monthly payments.
Why get a family offset mortgage?
A family offset mortgage can be an effective way to help a family member onto the housing ladder.
- They make buying a home more manageable for borrowers. By reducing the LTV, family offset mortgages help buyers reduce the size of the mortgage deal.
- You can buy with a lower deposit. With a parent or family member’s help, a buyer won’t need to save up a full deposit themselves. That can make buying a place much more achievable.
And the benefits aren’t only for the homebuyer. There are perks for the family member too:
- They can be less of a financial burden than a gift or even a loan. With an offset mortgage, parents can help their children buy a home without putting their savings into a deposit. In many offset accounts, parents can still access their savings.
- Offset accounts can be tax efficient. While they will probably forfeit the interest on their savings, this is not always a bad thing—particularly for higher rate taxpayers. Instead, it can mean that their savings aren’t taxed in the same way because they’re not earning any interest from them.
Are there any disadvantages?
Like any mortgage deal, a family offset mortgage won’t be right for everyone. Before you commit to one, here’s what you should know:
- You may get a worse interest rate than using a deposit. Using a deposit rather than offsetting your mortgage can unlock better deals.
- Parents won’t get any interest on their savings. While it can reduce their tax bill, parents won’t benefit from any growth in their savings’ value.
- There aren’t many family offset mortgages out there. The options for family offset deals are limited. You may need to have a savings account with the same lender that gives you the mortgage. At Habito, we can help you navigate your options.
- If parents want to access their savings, the mortgage payments may have to increase. Usually, lenders put a lower limit on the amount of savings in the linked account. That means that while you can access them, it is not always a great idea.
If a family offset mortgage doesn’t feel right for your needs, don’t sweat, there are alternatives. As ever, they come with pros and cons.
Here are the other options for your parents to help you buy a home:
- Money towards your deposit. Rather than using an offset savings account, your parents could gift you the deposit instead. A gifted deposit is exactly that—a gift rather than a loan that you have to pay back.
- A loan for your deposit. Rather than an outright gift, your parents can loan you a deposit. In these cases, it's a good idea to make it legal, so your parents know they will get their money back at some point. Usually, your mortgage provider will want to know about any loans—and it may affect whether they give you a deal.
- Family deposit mortgages. Even if your parents don’t have the cash available, they can still help with a family deposit mortgage. If your parents have a mortgage deal themselves, they can use the amount of their home that they currently own—called equity—as security against your mortgage.
- Guarantor mortgages. Alternatively, your parents can take on the legal responsibility of paying back your mortgage by becoming guarantors on your deal. That means if you’re unable to pay for whatever reason, it’s their job.
- Joint ownership or tenants in common mortgages. Your parents could also help you buy a place by owning it with you. This lets them help you while securing an investment for themselves. A word of warning though—this can make the purchase more expensive if they own a property already because of the tax implications of having a second home. (Read here for the details.)
How to get a family offset mortgage
To get a family offset mortgage, you will need to make sure you’re eligible. It’s similar to getting any other mortgage deal, but there are some extra hoops to jump through:
- To begin with, make sure you can afford the repayments. To do that, you can check out our mortgage affordability calculator here.
- Confirm that your lender accepts your family member. Sometimes, family offset mortgages only allow parents to offset your mortgage. In other cases, they might accept grandparents or other close relatives—but it usually needs to stay in the immediate family.
- Check you have enough savings. How much money you need in the savings account will depend on the lender. The value of the property may also be a factor, but some lenders simply require a fixed amount.
- See that you have a low enough loan-to-value (LTV) ratio. Lenders tend to cap the LTV ratio. Alongside having the savings account in place, you may need to save for a deposit to make sure you’re below this limit.
Where can you get a family offset mortgage?
While there are many lenders out there, not all of them offer family offset mortgages. That means going directly to mortgage lenders might limit your options.
Instead, talk to a whole-of-market mortgage broker, like Habito, who can access the entire mortgage market. Get started here.