Offset mortgage used as bridging loan?

susan963

Hello Moneysavers,

I need some advice about offset mortgages, please. We're trying to buy a new house without having to sell our existing house first (which we own outright). In order to do this, we're looking at offset mortgages, which we would essentially use as a bridging loan. Has anyone tried this before? Is there a catch in the fine print? It all seems too good to be true.

If I understand it correctly, we would be able to take out a mortgage and then offset the interest on the loan with our savings (in this case the value of our existing house once it's sold) essentially reducing the balance to zero. Whether we keep the money in the linked savings account for the whole duration of the mortgage term or actually pay it off seems irrelevant, though we would prefer to pay it off as soon as possible.

The specific mortgage we've been looking at is First Direct's interest-only offset tracker for 2 years. Without going into specifics, our downpayment would be 60% of the value of the house we want to buy with a mortgage for the remainder 40% (which happens to be the same amount as we expect to get for our existing house when sold). The mortgage terms clearly state that there are no early repayment charges.

Does this mean we can use the offset mortgage as a cheap bridging loan like I described or did we miss something important here?

Has anyone had any experience with these types of mortgages?

Any advice would be appreciated, thanks!

Susan

Thrugelmir

To simplify matters. The question is would a lender allow you to remortgage your existing property to release a high % of the equity. Possibly not, as not the purpose of mortgage lending. The purpose of the release may be well an issue for some lenders.

ViolaLass

Thrugelmir wrote: »

To simplify matters. The question is would a lender allow you to remortgage your existing property to release a high % of the equity. Possibly not, as not the purpose of mortgage lending. The purpose of the release may be well an issue for some lenders.

As I understood it, they want to get an off-set mortgage on the NEW property, not the current one.

susan963

Perhaps I didn't explain this clearly. We don't want to remortgage our existing property. The purpose of the lending would be to finance the purchase of our new house (as if we were first time buyers with 60% equity). Are you saying we would not be allowed to use the value of our current house as a collateral for the capital repayment of the mortgage? Why?

Imma_Number

Are you saying you have savings to the value of 60% of the house you wish to buy?

ie You wish to buy the new house by putting down your savings as the 60% and have a mortgage on the new house for the remaining 40%. Then, when you do sell your old house, (which is 40% the value of the new house) you'd put the money from that into the offset account so the interest would be zero?

mrginge

susan963 wrote: »

Perhaps I didn't explain this clearly. We don't want to remortgage our existing property. The purpose of the lending would be to finance the purchase of our new house (as if we were first time buyers with 60% equity). Are you saying we would not be allowed to use the value of our current house as a collateral for the capital repayment of the mortgage? Why?

I'm confused too.
You can't use the value of your current house as collateral on your new one. You need cash for the 60%.

Is that what you have? Are you planning to use some savings and then replace that when you sell your current house?

susan963

Yes, we have savings for 60% of the value of the new house, plus we own our current house outright. Potentially, if we first sold our current house, we could move without a mortgage. However, we desperately want to avoid being caught up in a chain and want to be able to move quickly if necessary. We also want to do up our current house before putting it on the market and it's not possible with us living in it.

We thought about moving into rented accommodation for a while but it would be a huge inconvenience for us and we would be under a lot of pressure to find a suitable house to buy within a short period of time. This is to be our "forever" house, so we don't want to compromise because of time constraints. That's why we want to put our finances in place and be in a position to make an offer and buy immediately, then sell our old house at our leisure (or even rent it out for a while before selling it). I was just wondering whether an offset mortgage would allow us to do this and afford us the flexibility to pay it off whenever we choose. This could be almost immediately or a couple of years later, we're not sure.

We're waiting for an advisor from First Direct to get back to us, but I just wanted to explore any pitfalls beforehand.

st3v31963

Hi

We did something very similar to this a few years ago, though with a different lender (Santander flexible tracker offset mortgage) At the time of taking out the loan, we were not sure if we wanted to sell our fully owned house, or rent it out.

Anyway, a few weeks after buying the new place, and doing some renovation to it before moving in, we decided to put the old house on the market, sold it for a decent price, and paid down some 75% of the original loan. No issues, no questions, no charges. Not sure if the reaction would be any different if I'd wanted to pay off the whole loan, other than having to pay back the cashback we got on completion.

So, I would say go for it, as it takes a whole bunch of stress out of the move, gives you some flexibility to do some improvements to the new place before moving in (or even to the old one before sale, to get a better price)

The only potential issue I can see is that, post-mmr, a lender might want to see more evidence of a repayment vehicle for the full amount of the loan before approving it. You might be able to use your old, fully owned house for this, but that's something that I've not looked at (yet, as I'd like to rerun this the next time I move).

You do need to be disciplined and not be tempted to go on a spending spree once you have the proceeds from the sale, but as you've presumably already paid off at least one mortgage then I think you already have the right mindset.

Hope this helps. Good luck with the move

St3v31963

dimbo61

Well you have a big deposit so if you earn enough to cover the other 40% you should be able to get a mortgage, But you may struggle to get Interest Only.
Once you have sold your old home you can put the funds into the offset account and either pay off the mortgage when out of the ERC period or go onto a offset repayment mortgage and drip feed the money from the offset each month into savings /investments when you make the mortgage payment.

susan963

Thanks st3v31963, that's exactly what I was hoping to hear. The fact that other people have done this, gives us some hope. When taking out the loan, did you tell them that you were going to finance the capital repayment through the sale of another property or did you have other investment or saving plans in place? Also, how many years did you take out the mortgage for?

My concern now is that they won't allow us to use our existing property as collateral for capital repayment on a short-term mortgage (for whatever reasons), in which case perhaps it would be better for us to take out a long-term loan and tell them that we are going to finance the repayments with our future earnings and potential rental income. However, in reality, we would just sell the house and pay off most or all of the mortgage early on.

dimbo61

Potential rental income !
This will be ignored as you are not getting this yet.
You need to be able to afford the new mortgage from income not rent or what your current property is worth or might sell for in 12/18/24 months