‘Undersold’, ‘misunderstood’, ‘complex’… the adjectives that describe offset mortgages aren’t the most flattering, but the somewhat unusual circumstances of the last 12 months may have created an environment and borrower need that could thrust the little mortgage product that could onto the centre stage.
“Through the coronavirus pandemic, over six million people in the UK have become ‘accidental savers’ due to a maintained income alongside reduced outgoings. That’s millions of people who could be looking for a way to make their savings work harder,” says Coventry Building Society head of intermediary relationships Jonathan Stinton.
Money stashes ballooning at a time when savings rates are still as low as they’ve ever been make for a golden opportunity. As Moneyfacts finance expert Eleanor Williams explains: “If a borrower’s mortgage rate is higher than the interest rate they are currently earning on their savings, they may find they can save more by repaying their mortgage than they would receive in savings interest, particularly if they pay tax on the latter.”
“I think they are, in many respects the best mortgage product on the market provided for the right people,” adds London Money mortgage adviser David Tasker.
“If you put money into a savings account with good access at a currently mythical 2% gross then as a higher rate taxpayer your net return would be 1.2%. If you put it into a linked offset savings account then it attracts 0% interest but is ‘netted’ off the mortgage overnight and the interest rate charged on that mortgage is usually 1.8% or higher,” explains John Charcol product technical manager Nick Morrey. “To get a return of 1.8% as a higher rate taxpayer then the gross rate of interest would have to be 3% – rarer than mythical.
He adds: “It’s perfect for people with savings that they would like to get to work harder than a savings account but not lose control over and not have them permanently applied to the mortgage account. The self-employed can save their tax money throughout the year. People planning for weddings can use it for that. People buying homes can max out their borrowing on day one, pay back what they are not using on day two (so don’t pay interest on those funds) and then draw it back out when they need it. It creates a credit facility.”
And it’s not just borrowers who could benefit from giving offset mortgages a push. As Stinton points out: “Offset could provide more touch points for brokers than a standard fix. Rather than just checking in with a client towards the end of a mortgage term, they provide an opportunity to get in touch on an annual basis to see how their clients are progressing with their savings goals.
“There is a credibility benefit here because we find that the borrower has very little knowledge of offset mortgages and few brokers discuss them,” adds Tasker.
For those convinced, the logical questions are surely why offset has remained an obscure mortgage in recent times, and how the industry can promote this type of borrowing? Stinton says that many people believe that offset mortgages are only suitable for people with large amounts of savings, while Tasker says that poor marketing thus far has been the main culprit to the first question.
“Often brokers only tell applicants about the savings they can make by putting money in the offset savings account. They don’t always explain the benefits,” says Morrey.
He believes Lenders don’t push offset enough: “I suspect the retention rate for product transfers with offset mortgages is higher than for traditional products and therefore I feel that they should be promoted more as they are beneficial to consumers and profitable to lenders.”
Tasks agrees with the sentiment: “Any good adviser will know the product and when to recommend it. There are two to three lenders who have excellent offset products so I would really like to see a bit activity from them to get the consumer awareness up to a point whereby they ask us about them before we get the chance to.”
And Stinton echoes one former prime minister in his call for “Education, education, education!” He continues: It’s up to lenders to offer helpful information to brokers on how offset works and the clients that it’s best suited for, and to provide resources to enable positive conversations. Active discussions between BDMs and brokers can only help matters too.”
“So let’s use them before some lenders decide they are not popular enough and dispense with them,” is the rallying cry from Morrey. “We saw this shortly after the financial crisis when Intelligent Finance and The One Account were both axed in cost cutting measures.
“The UK lost two very flexible and well thought through mortgage options,” he concludes.
