An offset mortgage can be an effective way of reducing the interest charged on a mortgage when a borrower also has substantial cash savings. I recently assisted a British client who wanted to purchase a £4 million property and use a significant cash reserve to reduce the cost of his borrowing.
The client had a strong and straightforward financial profile and planned to contribute 50% of the purchase price as a deposit. This meant he required a £2 million mortgage against the £4 million property.
He also wanted the security of a five-year fixed rate. However, finding an offset mortgage suitable for borrowing at this level was not straightforward. While a number of lenders offer offset facilities, the amount that can be offset and the way the linked savings are treated can vary considerably between products.
I therefore reviewed options across my lender network to identify a facility that would allow the client to make meaningful use of his substantial cash reserves while retaining the borrowing required for the purchase.
Fortunately, I had an established relationship with a lender offering a fully offset mortgage facility. The lender agreed to provide the £2 million mortgage on a five-year fixed rate of 1.9% at the time.
The client also intended to retain approximately £2 million in savings. Because the facility was fully offset, the balance held in the linked savings account could be used to reduce the balance on which mortgage interest was calculated, subject to the lender’s terms. This meant the client could retain access to his cash while potentially significantly reducing the interest payable on the mortgage.
The structure provided the client with both the five-year rate security he wanted and the flexibility to make use of his substantial cash reserves without committing all of those funds directly towards the property purchase.
The case demonstrates how a large mortgage can sometimes be structured around a client’s wider balance sheet rather than simply the value of the property and their income. For high-net-worth borrowers with substantial cash reserves, an offset facility may be worth considering where the lender and product are suitable.
Disclaimer:
This case study is for illustrative purposes only and does not constitute financial, legal, tax or investment advice. Finance is subject to status, underwriting, affordability, property suitability and lender criteria. Terms, rates, LTVs and availability may vary depending on individual circumstances. The benefits of an offset mortgage depend on the balance held in the linked account and the specific terms of the mortgage.
Risk Warning:
Your property may be repossessed if you do not keep up repayments on your mortgage or other borrowing secured against it. Property values can fall as well as rise. Savings held in an offset account may reduce the interest charged on the associated mortgage, but the precise benefit will depend on the lender’s terms and the balance maintained.
Information contained in our case studies is for market and illustrative purposes only. In some cases, these may be made up of multiple cases and are for illustrative purposes only.
Some case studies are made up of enquiries that have come into the business, not all business completes, and the posting of a case study does not represent a completed piece of business.
Property values can fall as well as rise, and you may not get back the amount originally invested. Property investments can be illiquid and may take time to sell. Where borrowing is used, your property may be repossessed if you do not keep up repayments on a mortgage or other loan secured against it.
