So, why do we recommend an offset, as opposed to a more conventional mortgage product? Offsets, also known as current account mortgages (CAMs) provide the customer with an efficient one-stop- shop for their banking and when worked correctly a customer can achieve their incomes working at the same rate as the mortgage.
These products also offer a great deal of flexibility with overpayments, underpayments, payment holidays, re-draw facilities and no redemption penalties being common.
Offset mortgages have become a recognised product over the past five years and most lenders now have some kind of offset deal in their portfolio. The traditional view that offsets only benefit wealthy homeowners is now changing. The current view is that these products are suitable for a much wider audience, especially considering that the historically high interest rates that these products are associated with are now becoming priced more in line with traditional products.
In the past there has been a price to pay for these products, typically around 1 per cent more than a traditional mortgage. However, recently that premium has largely been removed, bringing the price of an offset into line with core products.
For the long haul?
Many advisers tend wrongly to pigeonhole offset products as only benefiting people with large amounts of savings. Indeed, typical comments might include: “Consumers paying the most tax and with large savings are the only people suited to an offset mortgage,” says research firm Defaqto. It says higher rate taxpayers with above average savings are the people best suited to take out offset mortgages. Even then, it only recommends them if the borrower is prepared to commit for the longer-term and is financially disciplined.
David Black, head of banking at Defaqto, says: “If it is approached as a fundamental part of a borrower's financial planning process an offset mortgage can offer great benefits. These are products for the long haul and should not be contemplated unless borrowers are certain they can leave significant sums of money untouched in savings accounts over the mortgage term. Any permanent reduction in the size of the deposit because of withdrawals will result in paying above market rates for the extra mortgage needed to balance the savings withdrawn.”
As the price of the offset is now within reason, many brokers will start to look at these products for their customers in order to achieve substantial mortgage interest savings. No longer will the high income multiples be the sole attraction to the broker, but instead the opportunity for the customer to use an offset as a vehicle with a number of facilities that allow years and interest savings over the term of the mortgage.
Intelligent Finance (IF) has recently commented that one-in-three households could benefit from offset mortgages with only 10 per cent of the mortgage balance having to be held in savings.
The lender calculates that one in three households in this country looking for a mortgage could save £312 per year if they were to choose to offset. As the price of offset deals has become more competitive, their appeal has widened. Homeowners only need a household income of £30,000 to make savings.
IF adds: “Our research indicates that a household only needs 10 per cent of their mortgage balance in savings to be better off with an offset. The flexibility of the product means cash can go in and out, with daily interest calculations having an immediate effect.’
Product variation
Moreover, instead of just a variable interest rate, many providers are now offering variations of products with fixed rate products recently emerging in the market, allowing the customer choice in a traditionally narrow product range.
In addition, while the traditional view is that high-income individuals with savings do benefit, it is also true that not only is their income earning the equivalent interest as the mortgage, but as high rate taxpayers they are not earning interest on their savings, so there is no tax to pay.
The many different products on the market allow brokers and customers a wide choice across many interest rates. While many products allow internet-only access to funds, an increasing number of banks offer a high-street CAM where funds can be paid in and withdrawn over the counter. This is proving popular with a more traditional customer who is technophobic, or perhaps less trusting of dealing with their finances on the internet.
At present offset products represent approximately 15 per cent of the mortgage market, predicted to rise to £84.7bn by 2009. According to new research by Moneyfacts, they will then make up 30 per cent of the total secured lending market. Its research also showed that the market has demonstrated strong growth since its launch in the UK in 1994 – being worth £29.2bn in 2004.
Moneyfacts says: “Offset mortgages provide consumers with the ability to manage their own repayment structure, permitting overpayments, underpayments and payment holidays, and with the possibility of a hassle free additional drawdown facility. If managed correctly consumers can soon see their mortgage term decrease. The ability to pool accounts, thereby reducing the interest accrued can be very beneficial particularly for the self-employed who save regularly for their tax bill. The interest on these savings would otherwise be taxed as additional income, but by offsetting these funds they work in the opposite manner, reducing the mortgage interest and not accruing any credit interest on which tax must be paid.”
“However as the rates offered tend to be higher than those found on ‘traditional’ mortgage products, they can be an expensive choice if the consumer does not make full use of the offset features, and are best used as part of a long-term financial plan. Consumers should keep an eye on the best-buy tables or mortgage comparison websites, and ensure they regularly seek independent financial advice to ensure the right mortgage vehicle is used to suit their individual circumstances,” it concludes.
Who can benefit?
So, given this background, who will benefit from an offset mortgage? Well, the self-employed can gain, as their tax bill can be saved for during the financial year, in a form of ‘savings jar’, and still be used to reduce the interest paid on the mortgage. Similarly, clients with substantial savings can effectively benefit from an interest free loan, while still having access to savings.
It’s clear therefore that offset mortgages can be a godsend to certain categories of borrower. But how can they be made more attractive to a wider audience? First of all, it’s worth suggesting that a fixed rate option would draw more potential borrowers. That way, customers could experience a maximum monthly payment, but with the offsetting facility so that this payment could be reduced, while at the same time having a longer-term effect of capping the mortgage. Equally, offset mortgages featuring longer term discounts could be offered, so that the monthly payments don’t rise too sharply after the initial three to six-month discounted incentive period.
Finally, the big question – will offset mortgages ever dominate the loans marketplace? This is a difficult one, and depends on a couple of disparate factors. Firstly, unless offset providers offer longer-term headline rate deals to people who do not strictly need the offsetting facility, there will always be a place for the traditional mortgage. And secondly, fixed rate products will always be attractive, and unless offset providers offer fixed rates in addition, they will clearly alienate this very substantial section of the mortgage market
