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The onset of offset

Offset mortgage business is growing but there is uncertainty among many people in the industry over who these products are suitable for.

The basic rule of thumb that has been applied by many has been that, due to the pricing of offset products, a client would need to deposit at least 20,000 to make it an attractive proposition but recent market trends do not reflect this.

The cheapest rates in terms of up-front discounts or fixed rates are normally not available on offset deals but it is in the offset market where we are seeing most innovation from providers.

When recommending a mortgage product, cheapest on day one is not always what is best for the client. There are many factors to take into account when looking at the pricing of an offset deal.

For example, what is the initial interest rate and how long does any discounted period last? Many offset mortgage products now offer up-front discounts comparable with normal discounted rates.

What is the rate of the mortgage after any discount runs out? Some lenders are now offering competitive base-rate tracker options, although beware, as many are only for a limited period before going on to a higher standard variable rate. Some, however, track the base rate for the life of the mortgage, which, when coupled with an offset facility, can be attrac- tive over the longer term.

What arrangement fees are payable? Most offset lenders charge an arrangement fee between 200 and 700 which adds to the cost of the mortgage and can offset any savings in the interest rate.

What other incentives does a lender offer, such as free valuations, legal costs and so on?

The point I am trying to make is that over the past two years we have seen a lot of movement in the offset market and instead of ruling products out by simply asking: “Is an offset mortgage suitable for this client?”, I would urge you ask the above questions, as you would with any other product, and then see if an offset product fits the bill.

We also need to consider a client’s requirement in terms of their risk appetite and whether a variable or tracker product suits them better or if they would prefer the safety of a fixed rate.

Again, the offset market has moved on and there is no reason why even those considering a fixed rate should not look at offset products.

Some lenders have introduced offset facilities against fixed-rate products, so providers are showing a willingness to make these types of products attractive to a much wider spectrum of borrowers rather than simply the high-net-worth clients with a large sum of cash they can easily put into an offset savings account.

So, assuming a competitive rate is available, how much could someone, with modest savings, benefit from an offset product?

Consider a younger applicant with a mortgage of 150,000 (repayment over 25 years) which tracks the base rate plus 0.75 per cent for the life of the loan and has a discount off this rate of 0.2 per cent for the first two years. No arrangement fees are being charged and the client wants to save 100 a month.

Instead of putting these in a traditional savings account and earning a modest rate of return and paying tax on the interest, they could pay this into an offset savings account monthly and over the term of the mortgage save 25,000 in interest costs and pay off their loan two years and three months early.

As disposable income grows, the amount saved could increase, leading to greater savings. It is important to remember as the monies have been put into a separate savings account they are immediately accessible and are not tied up, should they be needed at short notice.

Offset mortgages are suitable for those with bigger balances to deposit and especially so for those with irregular incomes or with tax bills to pay, where the savings can be substantial. I would, however, urge you not to rule them out for your average borrower simply because they do not have 20,000 or 30,000 sitting about in a savings account.

The market is still evolving but there have been real developments in terms of product appeal and pricing which continue to make offset mortgages more mainstream and suitable for a broader spectrum of clients.

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