Next summer the UK’s offset mortgage market will celebrate its 15th birthday, and like many teenagers it has made huge strides forward in its relatively short life, but it still has an enormous amount of potential to realise.
Woolwich was the first lender to offer an offset mortgage back in the summer of 2000, and since then many others have come to market.
Despite a number of players who then withdrew, the offset sector is still served by 22 lenders, and there are currently 341 offset mortgage products available, according to data from Moneysupermarket.com.
According to Datamonitor, offset mortgages account for 10.5 per cent of the market, equating to £18.5bn worth of mortgage lending in 2013 (based on the 2013 report UK Mortgage Market: Forecasts and Future Opportunities). But just how big could the offset sector become, and how much has it already changed to get to where it is today?
At its heart, the offset mortgage proposition is essentially the same as it was when the concept was first launched. Borrowers can use savings to offset against the amount of mortgage debt they have and by doing so they can reduce either the term of their mortgage or the amount they pay on a monthly basis.
These benefits are hugely attractive – who would not want to reduce their monthly mortgage payment or shorten the term of their mortgage? But despite this, many borrowers have struggled to see how an offset mortgage could work for them in practical terms, or get over the administrative barriers that were initially put in their way.
The first offset mortgages required borrowers to move their current accounts so that they were with the same lender that was providing the mortgage. Immediately, this put off a lot of potential offset customers, and no matter how well they thought the product could work for them, they just could not bring themselves to change their current account arrangements.
Even in today’s market where the current account switch guarantee states that the move to a new current account must be completed in seven days, consumers are still reticent to make the jump.
Linkage
To get past this problem, many banks have moved away from insisting that offset mortgage borrowers also need to have a current account with them. Instead, banks are moving towards a system of linking offset accounts with customers able to transfer funds into this from their everyday current account. This move has reduced the administration that goes with taking out an offset mortgage, and made it an easier decision for borrowers who are interested in the product.
In the early days of offset mortgages there was also a small but significant differential between the rates available in the offset sector and those available for other products such as fixed or variable mortgages.
Commentators predicted that in time this differential would be eaten away, and that is very much how things stand today. Offsetting has become such an integral part of mortgages that it is now a core part of some lenders’ mortgage facilities.
By removing the need to switch current accounts, and by doing away with the pricing differential on offset products, some lenders have helped make the sector a lot more accessible to borrowers.
This evolution is very welcome, and in turn it has helped brokers offer offset mortgages as a mainstream option and not one that requires any extra effort. This has helped to debunk the myth that they are only appropriate for wealthy people or those with large amounts of savings.
The truth is very different, and offsetting works very effectively for a wide range of people. If borrowers have a lump sum of savings, they can put it against the mortgage and either reduce the term of their mortgage or their monthly payment.
If they want to make payments of £50 a month into their offset account, this will slowly build up and, again, enable them to reduce either the term or the monthly payment they make on their mortgage.
People depositing money in a savings account will have to pay tax on any interest they earn. This does not happen with money put in an offset account, where no interest is earned and so there is no tax liability.
Where people are self-employed and save money to pay their tax bills, offsetting this money against their mortgage lets them put it to good use, while keeping it readily available to pay the taxman when required.
Explaining these benefits in writing or even in face-to-face meetings has often proved challenging for brokers, especially when it comes to showing clients exactly how an offset mortgage would fit in with their own circumstances. But the advent of universal broadband and the development of online tools have made this much easier.
Connectivity
In 2000, when offset mortgages hit the market, broadband internet connections were a luxury enjoyed mainly by those in the largest cities, and even then connection speeds were not a patch on what they are now. Today, broadband connections are much faster and more widely available, and improvements for the most remote areas continue to be made.
This has allowed a number of other providers to develop online tools and calculators that show in practical terms just how an offset mortgage will work for individual customers. It has also made transferring money from existing current accounts into offset accounts incredibly easy.
These changes have all contributed to making the offset market more accessible, more convenient and more easily understood for borrowers across the UK. The difficult financial environment of recent years has also prompted more people to really think about how they can make their money work harder and set up their finances in a way that is efficient and flexible. How big the offset mortgage market ultimately becomes is impossible to predict, but anecdotal evidence suggests that an increasing number of mortgage advisers are choosing to take out an offset mortgage for themselves.
Gordon Bowden is business development director of Scottish Widows Bank
Key points
Offset mortgages account for 10.5 per cent of the market, equating to £18.5bn worth of mortgage lending in 2013 according to Datamonitor
Borrowers are no longer required to have their current account with their mortgage lender
Online calculators now available to show at-a-glance forecasts
