The UK market is beginning to see offset mortgages grow in popularity as more UK borrowers embrace the concept of offsetting their current and savings accounts against their mortgage to reduce interest payments and the term of their mortgage.
Despite the obvious benefits of offsetting, particularly in light of rising interest rates, many borrowers who could benefit and save money by using such a facility still often choose a more conventional mortgage.
Whether this is due to a lack of understanding from intermediaries or the fact that the historical viewpoint that there is generally a premium to be paid for an offset-type mortgage currently prevails, offset mortgages have been slow to take off with brokers and borrowers alike.
However with 32 offset mortgage providers now in the market, an economic climate of higher interest rates and offset pricing not too far away from mainstream, it is unsurprising that Yorkshire Bank and its sister company, Clydesdale Bank, say they have seen the total amount of money borrowed through them grow by a third since last Summer.
Understanding the benefits
Cammy Amaira, sales director at Intelligent Finance agrees that this is an ongoing trend. She says: “There is no question that the offset market is growing rapidly. Indeed, according to Datamonitor, the offset mortgage market currently occupies a 10 per cent share of the total market and forecasts that this is set to grow to a staggering 30 per cent by 2009. We carried out research last year which established that one in three UK households looking for a mortgage could be better off with offset, to the tune of over £300 a year.
“People are finally understanding the benefits of the offset proposition and recognise that offsetting can give them a ‘real rate’ as high as 11 per cent. Getting a competitive mortgage and savings rate doesn’t need to involve moving money every six months as offsetting offers both long-term value and flexibility.”
In view of this increasing consumer awareness, combined with a growing belief that banks will soon start charging customers for the use of a current account facilities, David Black, head of banking at Defaqto, believes that offset mortgages will eventually become even more popular.
But is current account charging likely to happen?
Growth predictions
With the Office of Fair Trading (OFT) set to report the findings from its investigation into current account charges this month, which affect 18.96 million people and generates £4 billion for banks. The OFT is likely to recommend a cap on fees, which will see banks’ profit margins squeezed and free banking likely to be replaced by monthly and annual fees, according to research from uSwitch.
Nick White, director of financial services at uSwitch, commented: “Customers have enjoyed free banking on current accounts for the past 23 years but the current backlash against charges for items such as overdrafts and bounced cheques, as well as ongoing investigations into lucrative financial products such as payment protection insurance on loans and credit cards, will serve as a catalyst for the fast introduction of monthly fees.”
In addition, other drivers which may influence banks’ decisions to charge fees for current acounts could also include the increasing amount of customers with bad debt and Individual Voluntary Arrangements. There has been increasing consumer action over retrieving charges and banks will want to retrieve that money from another source.
Banks are also facing pressure to reduce the clearing cycle on cheques, and not holding the cheque in their accounts while it is processed.
David Black, head of banking at Defaqto, says: “If these things do happen and fees are introduced, a lot of banks will be trying to sell their current account facilities based on added value, such as offering a free current account facility with your offset mortgage. By next year, we could see larger banks introduce fees, in which case other banks will follow. Offering free current accounts with offsets would be another marketing ploy, but I think it will increase the popularity of offset mortgages.”
Predicting the future
Despite the benefits that offset mortgages could derive from the introduction of current account charges, much depends on whether the fees are actually introduced and, if they are introduced, whether ‘people power’ will overturn them, as it has done with overdraft charges.
Although fees may be a catalyst in prompting people to consider offset mortgages, fundamentally it is the product that sells itself.
Darren Pescod, managing director of The Mortgage Broker, said: “The market share of offset mortgages will increase over the next five years due to the nature of the product and the benefits it can offer to an experienced investor or shrewd saver.
“However, I don’t feel that people will rush to change their mortgages to offsets if banks re-introduce charges to current accounts. Offsetting is not for everyone and to take on an offset mortgage, with the sole intention of just saving a few pounds on bank charges will probably not be the wisest decision. It comes at a cost with generally slightly higher rates and fees compared to other prime mortgages.
“Offsetting needs to be utilised in order for it to be cost-effective and is a clever choice for consumers who wish to make overpayments, who have credit balances, who receive annual bonuses or for those who just want more flexibility in their finances.
