Renting out a room could cut over 2 years off your offset mortgage

As first direct launches a range of new offset mortgage rates the direct bank has discovered that by renting out a spare room for just five years, homeowners with an offset mortgage could reap the benefits.

By using monthly rent to make mortgage overpayments the typical homeowner could save over £1,028 in interest in just 5 years, and pay off their mortgage 29 months earlier.
With students returning to university and house prices remaining out of reach for many, now is the perfect time for offset mortgage holders to rent out their spare room, save money and reduce the term of their mortgage.
The Government's Rent a Room scheme allows homeowners to let a furnished room in their house up to the value of £4,250 per year, without paying tax. This means that any homeowners with space to spare could earn up to an extra £354 per month to put towards their mortgage costs.

first direct's offset mortgage allows unlimited overpayments. So the bank calculated that by making monthly overpayments of £354 for 5 years on the their market leading 65% LTV 3 year fixed rate offset mortgage, currently 3.49% with a £499 booking fee, homeowners would save £1,028 in interest payments and shave 29 months off their mortgage.

Should you consider an offset mortgage?

If you don't already have an offset mortgage, remember that they are only really suitable for those with a large savings pot - as you offset your savings against your mortgage borrowing, only paying interest on the difference.

Would renting a room help with any other type of mortgage repayments?

If you have a mortgage which does not penalise you for overpayments then it could. The extra money from your rent can be put towards a bigger mortgage repayment one month, or help cushion a more meagre month further down the line.

Effectively you could still use it to repay your mortgage more quickly. Be sure to check what your providers rules and limits are for overpaying though.
Richard Tolchard, Senior Mortgage Product Manager at first direct commented: "As long as all necessary precautions have been taken, having a lodger is a really easy way for homeowners to earn more cash and reduce the term of their mortgage.
"The added benefit of first direct's flexible offset is that if homeowners need access to the money they've overpaid they could redraw up to the original amount of the mortgage borrowing."
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