Building society launches offset mortgage to cut buy-to-let investors’ costs

Anew “offset” mortgage could help buy-to-let investors cut their costs as the new tax regime takes effect.

The Family Building Society this week launched a buy-to-let offset mortgage, which allows private landlords to use their savings to cut their tax bill. From this week landlords can no longer offset their mortgage interest against their profits (see Pages 1 & 3) and face higher tax bills as a result.

The new mortgage will allow landlords to put spare cash into an account with the society which is “offset” against the mortgage balance to reduce the interest due. By doing so they can cut their costs at a time when tax bills are rising.

Keith Barber of the society said: “Offsetting savings against your mortgage reduces the amount of interest charged. The effect of this is to increase the profit from letting and increase the landlord’s net cash flow.”

The move marks a return of innovation in the mortgage market, said Alistair Hargreaves of John Charcol, the mortgage broker. “Hopefully this will bring more offset buy-to-let products into the market, and it’s very good to see lenders innovating in the current market.”

Just two other providers offer a buyto-let offset mortgage, Hinckley & Rugby Building Society and Clydesdale Bank, although the latter does not currently offer competitive rates, charging 5.35pc. Family charges 2.99pc for two years before the rate revertsr to the standard variable rate, currently 5.29pc. Hinckley & Rugby charges 2.89pc and the loan is a lifetime standard variablev mortgage, meaning there isi no discount windoww that will end. On the Family mortgage landlords can use the offset either to reduce the monthly amount they pay or to reduce the term of the mortgage by effectively using the interest saved to pay off some of the capital. The Hinckley mortgage offers only the latter option.

David Hollingworth of London & Country Mortgages, a broker, said: “I like the concept of an offset option for buy-to-let as a way of reducing interest costs with an associated savings pot. That approach could hold more appeal for landlords who will become increasingly keen to reduce interest charges as the tax relief changes begin to take effect.

“In the past the ability to offset mortgage interest [against rental income] perhaps meant landlords put less effort into cutting the interest. Managing their costs will be really important to ensure that a growing tax bill doesn’t eat too heavily into the profit of the property.”

However, he said buy-tolet investors could save more money by simply remortgaging to a lower interest rate.

For example, someone with an interest-only mortgage of £200,000 and annual rental income of £18,000 would, by using £40,000 of offsetting with the Family mortgage, make just under £7,000 in profit after all taxes. However, by remortgaging to a 2pc deal with no offset the same individual could generate £7,600 of profit a year after tax.

“Just as in the owneroccupier market, offset rates can be higher than the standard rates. So landlords will need to balance how much they will use the offset facility to ensure that it will work for them,” said Mr Hollingworth.