How offset buy-to-let mortgages can help landlords to increase their cashflow

Over the last year, along with most sectors, the buy-to-let market has been hard hit, with purchase activity down by 53% in 2023. The outlook for 2024 is brighter though, with rate of decline forecast to slow to a 13% contraction.

This recent decline, however, comes after two decades of significant growth and the buy-to-let market is still substantial. It’s a resilient market that has been through many turbulent times.

There is still a need for buy-to-let property. It’s a good asset with long term growth and strong rental income. With demand for housing still outstripping supply, there isn’t enough housing stock and many renters are competing for homes in oversubscribed markets. This has alleviated some pressures on landlords by allowing them to pass on some of the increased costs to their tenants. Rents have gone up by 6.2% in the UK last 12 months to January 2024.

We often hear in the press that there is an exodus of landlords from the market but is that the reality?

The market has been consolidating as landlords with only a few properties are likely to exit the market. And recent market data indicates that larger landlords are likely to be buying up some of the properties sold by smaller landlords. The accidental landlord may fall by the wayside, but professional landlords are in there for the long-game.

Lenders and brokers need to be innovative and think of new ideas

With landlords riding out the market downturn, plus the impact of recent changes in legislation and tax rules, they’re eager to utilise rent monies and accrued savings in the most financially savvy way. Customers are increasingly interested in different ways of funding as historical go-to options like second charges, bridging, or development financing became more expensive, especially in light of the higher cost and delay of materials.

One innovative product that we’re seeing a rise in popularity in, is the buy-to-let offset mortgage, especially for professional landlords and those with a portfolio of properties. An offset mortgage can help landlords to increase their overall cashflow and ultimately increase their net profit.

The main benefit of an offset mortgage, where savings are linked to a mortgage account, is either greater cash flow via reduced monthly payments or a shorter length of time that they’ve got the mortgage secured against the property as more of the payment goes to capital reduction rather than interest. Either way, those funds are put to better use than sitting in a low-rate current account, or a savings account where interest is potentially subject to income tax and, importantly, the funds are still available to use whenever needed.

How offsetting works

With an offset mortgage, a client can deposit their savings into an offset savings account linked to their mortgage. They can usually choose between balance reduction or payment reduction options. With balance reduction the client pays the full mortgage payment each month but the benefit from offsetting their savings goes towards reducing the capital, reducing the balance faster. With payment reduction, the offset savings are used to lower monthly payments, which can improve cashflow. Either way, the mortgage can be fully offset.

Landlords can also use a buy-to-let offset mortgage to create a tiered and tapered approach, with the ability to fund new properties without chasing more funding. It’s for landlords looking to put their eggs in different baskets by not just utilising one type of funding but leveraging multiple products.

Making investments work harder

To illustrate the point, if someone had five buy-to-let properties each netting £500 a month, that’s £2,500 every month they could add to an offset account giving them £30,000 annually to lower the interest due on their properties. When their tax bill comes at the end of the year or when it’s time to complete a renovation or repair, they can easily access the funds — but in the meantime, it’s benefitting them.

Other options could be putting their money into a high interest savings account but, depending on their tax position, with that scenario they could potentially be liable for up to 45% income tax gain which makes the high interest rate they’re getting less attractive. Though they could save that interest by using an ISA, there’s a contribution limit and if they do take it out, can’t necessarily put it straight back in again.

With an offset account, they are saving interest rather than gaining it in income, so it’s saving them money and a potential tax liability moving forward. They’re making their investments work harder, saving themselves money and keeping it accessible should they need it later on.