Offset residential mortgage

[Moonshine]

Has anyone used a offset residential mortgage to fund their build, like a self build mortgage, releasing in stages?

 

I am looking to release some of the equity in my existing house to help fund the build of a new house.

 

What i am thinking is that if there is a lump of money in an offset account (e.g £100k) then i would only be charged interest on the difference from the total borrowed, and over the course of the build the offset amount would go down.

 

What am i missing and the down sides of this plan?

[Ian]

Yes, we used money in an offset mortgage savings account to fund our complete new build holiday home. Total build cost was £96k for a 2 bed detached bungalow (already owned the site).

 

edit: I’m self employed and had the offset mortgage on our main house for a long time before deciding to do the self-build. It was ideal as I didn’t need to ask anyone for a loan and full flexible access to the money in the offset account meant it was all very easy.

Edited November 12, 2020 by Ian

[Mania]

20 hours ago, Moonshine said:

What i am thinking is that if there is a lump of money in an offset account (e.g £100k) then i would only be charged interest on the difference from the total borrowed, and over the course of the build the offset amount would go down.

 

What am i missing and the down sides of this plan?

You aren't missing anything.

 

The funds in the offset account will be fluid for you to draw as required up to e.g. £100k. The interest rate will be fixed and monthly repayments can be too, but assuming it will be a repayment mortgage you can also opt for the monthly repayments to be reduced as the principle amount comes down so that you can accumulate a bit more for the build fund! Alternatively the "overpayments" can sit on your mortgage account until you decide if you want to reduce your mortgage term instead (by keeping the monthly payments the same).

 

If you need further borrowing most offset mortgage lenders will provide you with additional borrowing at the same rate. But I don't see any harm in borrowing a bit extra as a buffer from the outset if you can because as you say you will only pay interest on the difference and can repay the principle as permitted if you don't utilise all the borrowed funds.

 

The only downsides I can think of are if you decide you want to reduce the principle, only 10% per annum is typically allowed, you can pay off more after the term. And I am sure you know about the early repayment charges in case you commit to a fixed term. Arrangement fees sit around the £999 - £1499 mark.

 

You are very fortunate as offset rates are low at the moment! If you can get it with an existing lender you may even be able to avoid survey fees. Good luck.