Purchasing a home can be an uphill climb for first-time buyers—mainly due to cost. The combination of decreased home availability and inflation have driven housing prices out of many aspiring homeowners’ price range in the post-pandemic world. But could something like a family offset mortgage work for those who perhaps can't afford a down payment on their own?
Higher prices are just one of the roadblocks new homebuyers face. Increased debt obligations (student loans, car payments, and credit cards), along with other everyday bills, make even saving up for a down payment more difficult. Add in the fact that mortgage rates have gone up significantly in recent years, and home ownership might begin to feel impossible for younger people.
As housing becomes more expensive, parental assistance has become more commonplace in getting young buyers their first home. There are several ways parents can help their children financially. That includes family offset mortgages, which connect family members’ savings to a borrower’s mortgage to help lower how much interest is charged on the loan.
Family offset mortgages can provide a much-needed helping hand to people looking to buy their first home. Keep reading to learn more about what family offset mortgages are, how they work, the benefits and disadvantages of getting one, and more.
What Is a Family Offset Mortgage?
A family offset mortgage is a type of home loan where the savings of parents or other family members are linked to the borrower’s mortgage to decrease the amount of interest that’s charged on the loan. With this setup, the borrower doesn’t have to use their own savings to offset their mortgage balance—their relatives’ savings that are in that linked account will offset it instead. Family members’ contributions do not pay down the loan; it instead lowers a part of the mortgage where interest is calculated.
Family offset mortgages also lower a borrower’s loan-to-value (LTV) ratio. This measures how much you are borrowing compared to your property’s value. A lower LTV is more favorable to mortgage lenders.
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How Do Family Offset Mortgages Work?
When a homeowner opts for a family offset mortgage, their parents or other relatives deposit funds into a linked savings account that the mortgage lender holds. The savings balance is then subtracted from the total mortgage when the interest is calculated. Interest is charged on the lower balance, and once the borrower(s) pay down part of the loan (typically 25%-30% of the balance), the savings can go back to their family members.
Depending on the family offset mortgage arrangement, relatives still own the savings they contributed and can access them. The lender might place a hold on them for a period of time, however.
Here’s how a family offset mortgage looks in practice:
- Borrowers have a $600,000 mortgage
- Family puts $150,000 in the special linked account, which is subtracted from the $600,000 balance
- Borrowers now pay interest on a $450,000 mortgage rather than a $600,000 mortgage, lowering their monthly payments and/or loan terms.
Pros and Cons of Family Offset Mortgages
Family offset mortgages can be beneficial to young homeowners. When their relatives contribute funds to the linked savings account, they have a lower mortgage balance on which to pay interest. That’s a big plus, but there are disadvantages to consider with family offset mortgages, too. Here’s a list of the pros and cons of family offset mortgages.
Pros
Lower interest costs for borrowers: When family offset mortgages bring down the balance figure that borrowers pay interest on, the loan, in turn, can reduce how much interest they’re paying overall.
Lower monthly mortgage payments: Again, if a mortgage balance drops from $800,000 to $650,000 thanks to a family offset mortgage, the borrowers will likely have a lower monthly payment due.
Easier loan qualification: When parents or other family members put money into the linked savings account, prospective homebuyers don’t have to borrow as much. The smaller the mortgage amount, the more comfortable lenders are to approve the borrowers. The buyer also probably won’t need as big a deposit as they would if they were going through the process on their own.
Access to funds: Family offset loans allow parents to help their children buy a home without actually giving or loaning them their money. A lot of offset mortgage accounts allow contributors to access their funds after a certain period of time.
Cons
Lost interest: Funds put into a linked family offset mortgage account won’t earn interest like they might in a traditional savings or brokerage account.
Worse interest rate: Family offset mortgage contributions can help borrowers lower their on-paper mortgage balance. However, there’s a chance the interest rate could be worse than if the borrowers made a traditional deposit.
Limited access to funds: Family members can access the savings they put into the linked account, but there could be restrictions. For example, if a parent wanted to pull funds, their children’s mortgage payments might increase. How much of the savings can be accessed at a given time could also be limited.
Uncommon option: Family offset mortgages are not widely available yet, so there’s a chance you might have to put your money in a bank that you might not use otherwise.
Who Should Consider a Family Offset Mortgage?
Family offset mortgages could be a good solution for first-time buyers who don’t have a lot of money for a big down payment. The same can be said for people looking to buy a home but who have a limited income and who haven't set aside as much for a deposit as they would like. Parents who have their own financial affairs in order—or at least a lot of money saved—or families who want to help but don’t want to gift money outright may also consider this type of mortgage.
Those looking for a shorter mortgage term could benefit from a family offset mortgage, too—a 30-year mortgage could be paid back in 25 years with less interest.
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Family Offset Mortgage Alternatives
If the idea of putting funds in an account that won’t yield interest doesn’t appeal to you, other ways exist to help your loved ones buy a home. Options include gifting them a down payment outright or loaning them the funds.
Depending on your financial situation, you could act as your child’s mortgage lender and loan them the entire mortgage to reduce the interest paid. In this scenario, it’s critical to treat it as a real loan, get formal documents, and be sure to pay taxes on interest earned.
Conclusion
Family offset mortgages allow family members to help their children buy their first home and lower how much interest they’ll pay on their mortgage by linking the loan to a special savings account. This type of home loan can be beneficial because it can decrease the borrower’s monthly mortgage payment, interest rates, loan term length, and loan-to-value ratio.
While borrowers may find this home loan advantageous, relatives may want to think twice before contributing their funds to the linked savings account. The money won’t earn interest, and they may have to wait before they can access their funds again. It’s admirable to want to help a family member make such a life-changing purchase, but be sure to explore all the options available to make it happen.
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