When offset mortgages were first launched into the mortgage market in the late 1990s, many predicted that they would be a niche product targeting the more financially astute customer. Today, the progress that offset has made in penetrating the mainstream mortgage market has been much greater than most expected. According to Datamonitor, the offset mortgage market currently occupies a 10 per cent share of the total market in 2004 and is forecasted to grow to just under a third of the market by 2009.
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A slow start
It is fair to say that growth levels in the market were slow initially and there are several reasons for this.
The concept of offsetting isn’t always an easy one for customers to get their head around. The idea that instead of earning interest on a large pot of savings the interest is deducted from the mortgage loan, is a different mindset from the traditional savings attitude of ‘watching your money grow’; with offsetting being more about ‘watching your debt shrink.’
Traditionally, offset mortgages were considered only suitable for those with larger balances to deposit, specifically those with irregular incomes or tax bills to pay where saving levels can be substantial. Pricing therefore reflected the type of customer that the product was targeting and the associated flexibility these products offered and so made the benefits unappealing to a more typical borrower.
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Spurring growth
So what has spurred the growth in the market? Consumers are becoming increasingly aware of the cost of borrowing and how to manage their finances to keep interest costs down. This is demonstrated by the Council of Mortgage Lenders’ figures which show that so far 76 per cent of borrowers in 2007 have opted for a fixed rate product. As interest rates on mortgages have crept up steadily over the past four years it has become increasingly important for the financially astute – consumers and advisers – to look more holistically at overall mortgage costs. Historically low returns on savings rates or stock market investments over the last few years have also encouraged people to look for a better home for their short-term savings.
More mainstream
Once the market was dominated by a handful of lenders but as the product has become more mainstream, more product innovation is entering this area of the market and competitive pressures mean lenders in this market are starting to look at product flexibility, rates and fees.
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An example of this is offset being available against fixed rate pricing. At the moment it’s mainly offered against shorter term fixed rates but as this is what the majority of borrowers still seem to be inclined to look for, it opens the offset market up to them without taking away the certainty of fixing their monthly payments over the short term.
Some lenders also offer it on a ‘part and part’ basis, where the client can have part of their mortgage on a competitive fixed rate and the other element on a discounted or tracker rate with savings offset against this. This can help satisfy the risk appetite of those still wary of the uncertainty of variable rate products.
In the current climate of Base Rate increases, both these types of product can offer a welcome safeguard to clients.
Pricing
In terms of pricing, we are now actually seeing pricing which is not far off mainstream and some lenders do not load rates at all when offering offset as a product feature. What this means is that instead of it being a product which only makes sense for those with a lump sum to offset, it can be considered for those who may not have large savings at the moment but would like to save £100 or £200 per month. Nowhere is it more appropriate than for the self-employed, who pay tax bills once or twice a year. Applicants simply put money away on a monthly basis, which is offset against their mortgage and then cleared out when needed and started again. The added benefit is that because they don’t receive interest on the savings balance then no tax is payable as no ‘income’ is being earned.
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For offset mortgages to be truly appealing to the wider market, it’s not just product design and pricing that has to be right; there also needs to be a change in consumer attitude. These type of products have the potential to appeal to a broad range of clients, encouraging people to save and pay off their debts sooner. Advisers have an important role to play in educating consumers and helping them to understand that what is cheapest on day one isn’t always the best advice over the longer term.
