On your marks, get offset
Offset mortgages are beset by lack of consumer understanding and reticence on the part of brokers but current market conditions provide a compelling case for such deals. Rachael Adams reports
Offset mortgages can be regarded as expensive and prohibitively complex but current low interest rates make a compelling case for mortgage borrowers with cash savings earning little or no interest.
In June, Bank of England governor Mervyn King said there would be no interest rate rise unless the UK economy is much stronger and unemployment is falling rather than rising.
Just last week, the Chancellor was forced to cut his growth forecast for this year, which means less chance of a rate rise and the possibility of better interest rates for anyone holding cash deposits.
Anyone with savings sitting in cash could find another way to use their deposit.
“There are good arguments for offset mortgages. People are struggling to get decent returns on their cash and a lot of them are nervous about investing,” says London and Country head of communications David Hollingworth. “A by-product is that they help you drive down your debt, which is very attractive in the current market.”
Industry consultant Jonathan Cornell says: “With the base rate so low, offset looks like great value. The fact that it gives phenomenal flexibility is also a positive.”
Hollingworth points out that the bank rate will inevitably rise, which is another argument in offset’s favour. He advises using the low rates to push debt down before rates start to climb.
Hollingworth says: “When offset mortgages first appeared 11 years ago, the question was, ’What is the premium for an offset rate?’ You still cannot get away from it.”
However, according to research by Defaqto, this gap has closed in recent years and Yorkshire Building Society only charges 0.1 per cent more on offset mortgages than it does on standard mortgages.
A more pertinent problem with offset mortgages is their limited suitability.
Cornell says: “People seem to think having an offset mortgage is a silver bullet - and it can be if you use it properly. For people who pay their salary in at the start of the month and their bills at the end, offset represents fantastic value.”
But he warns that people with multiple current accounts who do not regard offset mortgages as a continual process will not benefit.
Hollingworth says: “The fear for some is they will buy a functionality they never end up using.”
The range of products is widening. Hollingworth says: “Most offsets were previously on a variable rate. Now there is more choice on fixed rates and trackers. Barclays is also giving a bit of a shove to offset mortgages by adding the two-year offset tracker.”
This was accompanied by a TV advert, a move welcomed by the industry. Cornell says: “Traditionally, lenders have not been good at marketing offset. The only one that leaps to mind is Barclays, leading the way with its ad campaign.”
Increasing publicity on offset mortgages could give them a boost. Research from Yorkshire Building Society found that lack of familiarity was the key issue, with 30 per cent of those polled not even aware of their existence.
Hollingworth says: “A lot of consumers understand the concept, it is just getting the message across. People who use offsets often become advocates of them.”
Cornell says: “Apart from Barclays, lenders do not want to develop these products. An offset mortgage tends to be quite expensive because of the technology required to link everything together. Look at how many of the UK’s biggest lenders have offset mortgages - it is not that many.”
Cornell says the reticence of lenders to provide offset mortgages could prove counterproductive. “Offsets are a good way of hanging on to clients. Historically, people have been good at moving mortgages around but offset gives lenders a better platform to develop longer relationships with them.”
He believes that new market entrants could take advantage of this potential for client retention. “Whoever is going to buy the Lloyds branches may be concerned that all the current accountholders will leave. An ideal way of hanging on to those borrowers would be giving them a decent mortgage linked to their current account.”
Cornell also says new players in the offset market will suffer less from technology costs as they can buy new equipment to suit their client base.
Hollingworth adds that the appeal of client retention is already giving the market a boost. He says: “Lenders like people sticking around for longer and buying more products, so some are starting to bring the family into the equation to get a whole other customer to market to.”
Lenders such as Newbury Building Society and Yorkshire Building Society have launched products that link family members’ savings to mortgages. Hollingworth says: “There must be some potential for the family offset idea to be brought into play. It could help children get a higher loan to value and make mortgages more of a lifestyle product.”
Family offsets are part of a new wave of mortgage innovation coming from building societies and Cornell feels the smaller lenders will lead the charge. “We have already seen Aldermore and Saffron Building Society develop different ways of doing things.”
Cornell sees one obstacle standing in the way of more innovative offset mortgage products. He says: “Half of mortgages are introduced by brokers but many brokers take a short-term view and sell clients the cheapest thing. While not necessarily bad, those brokers who resist offset on grounds of complexity may be doing themselves and their clients a disservice.”
However, Hollingworth feels it is clients’ attitudes to offset rather than brokers that will keep a lid on demand. “Some borrowers will always have a phobia of offset mortgages and some may not find them suitable.
“Market conditions may make people take a second look at offset mortgages but some people really will be better off with a bog-standard product. I do not see offset gaining a majority market share any time soon.”