Offset for flexibility in a changing environment

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As the first major lender in the UK to offer a fully-fledged offset mortgage almost 15 years ago and with multiple awards won consistently each year since inception Woolwich mortgages from Barclays has a proud history in this area of the market. For Andy Gray, managing director for mortgages at Barclays, the key to success with this product is keeping it simple and targeting the needs of customers.

He says: “The early version of offset from other providers were current account mortgages, which, in effect, were glorified current accounts with massive overdrafts that included the mortgage itself. It evolved into a product that was perceived as only really being suitable for high-net-worth clients before we made the decision to come to market with a product that had much wider mass market appeal.

“We learned lessons from the Australian market, which is the home of this type of product, seeking to create something that would allow customers to holistically manage their mortgage, savings and current account in a simple way. In the old versions, everything tended to be lumped together in one pot and it wasn’t very transparent. We focused on putting things together in the simplest way possible, bringing together what are the most basic financial products – mortgage, current and savings accounts – in a way that cuts through any complexity.” The product works by linking up to 12 eligible linked Barclays accounts (savings, current account or Barclays cash ISAs) to a Woolwich mortgage. A feature that differentiates this offering is that customers are able to link Barclays cash ISAs keep any historical cash ISA and allowances, which is an appealing option for those looking to maximise tax efficiency. Interest is calculated daily and only charged on the difference between the mortgage balance and the balances in the linked accounts.

Savings interest is not paid on linked accounts however customers effectively earn interest on their savings at the mortgage rate as they only pay interest on the difference between the mortgage amount and the balances in a linked offset account.

The beauty of a product like this is giving the customer the power to manage their money in the way that best suits them, allowing for changes in circumstances in the future

Flexible payments: clients can overpay as much as they like, whenever they can. However, fees may apply when they repay their mortgage in full.

Customers can choose or change the Offsetting arrangement between monthly payment reduction or mortgage term reduction at any time.

“The offset mortgage is backed up by an excellent service proposition, with online banking and specific online mortgage tools available to help customers view their accounts, how those accounts are working together and to make any changes they require,” Mr Gray says. “At a glance, customers can see the term of the mortgage, the monthly payments and the balances of the current and savings account. It also demonstrates what would happen if the customer chose to make an overpayment or to link another account.”

On average, customers can pay their mortgages off between three to four years earlier by opting for a Woolwich offset mortgage depending on the balances held in the offset linked accounts and taking term reduction option rather than immediate benefit of reduced payments (see chart). However, there is the potential to reduce the term of the mortgage even further by making over payments or including a greater amount in the linked savings and current accounts. There are also benefits to going for a offset tracker mortgage as opposed to the fixed rate offset mortgages from other providers because of the relationship between the mortgage rate and the savings rate if the bank base rate does go up.

“There are fixed offset mortgages out there, but we do not offer one as we have seen that there is little appetite for it at the moment. Customers are keener to have the flexibility of a tracker-based mortgage, where they are insulated from rate changes by the positive impact it would have on the savings rate. It is a key benefit of this type of mortgage. Indeed, the offset mortgage was born in a much higher interest rate environment than today and will remain just as relevant to customers because of that link between the mortgage and savings rates.”

Mr Gray acknowledges that, while the product has broad appeal, it is not the best option for everyone. He stresses that this is where seeking good quality advice plays a huge part, with intermediaries able to select the product that best suits their clients’ needs, whether that be the flexibility of an offset mortgage or the stability of a fixed rate. He also highlights that Woolwich has other great mortgages in its stable for those who choose not to go down the offset route.

“It is not going to be suitable for every customer,” Mr Gray confirms. “The customer needs to have a strong savings balance or the potential for building a strong balance in the future to make it worthwhile. For that reason it tends to not appeal to first time buyers, who commonly put their savings into the deposit for the property. We would say it is better for those looking to remortgage or for second or third time buyers.

“It is obviously very suitable for affluent clients, those who are self-employed or higher rate tax payers, who appreciate the flexibility that it allows. Part of the advice process is to understand what the customer’s goals are. For some people the aim will be to pay off the mortgage in a shorter time frame, reducing the interest on the loan, but retaining that flexibility so, if their situation changes, they still have access to that money. People may decide to reduce the term of the mortgage or reduce the monthly payments, depending on where they are in the life of the mortgage.

“The beauty of a product like this is giving the customer the power to manage their money in the way that best suits them, allowing for changes in circumstances in the future. That is why I would urge advisers to take another look at offset. For while some see that interest rate rises mean fixed rate is the only option, for some customers offset will enable them to manage their money in a more beneficial way.”

Andy Gray is Managing Director at Barclays

CV:

■ Andy Gray was appointed to his current role in January 2004. He reports to Steve Weston, CEO, Mortgages, Personal and Corporate Banking.

■ Andy was previously Head of Products, UK Mortgages, a post he held from 2001 when the Group integrated the mortgage businesses of Barclays and Woolwich.

■ Andy Gray originally joined Barclays in 1997 from Bank of Ireland where he was Marketing Manager, having worked in both savings and mortgage business. Prior to Bank of Ireland, he spent 6 years working for Abbey National, joining as part of their graduate intake, then holding roles in distribution, market planning and research.

■ Andy was responsible for designing and introducing Barclays Flexible mortgage products including the UK high streets first Offset and Flexible mortgages.

Term ReductionReduce Monthly Repayments
Offset ProductMortgage RateTerm ReductionInitial SavingsAverage Monthly Savings
2 year tracker up to 60% LTV1.99%2 Yrs 10 Months£166.67£147.34
2 year tracker up to 75% LTV2.49%3 Yrs 6 Months£208.54£185.53
Lifetime tracker up to 75% LTV2.99%4 Yrs 2 Months£250.41£224.12

Your home may be repossessed if you do not keep up repayments on your mortgage.

The Woolwich’ and ‘Woolwich’ are trademarks of Barclays Bank PLC which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register No. 122702). Barclays Bank PLC. Registered in England. Registered No. 1026167.

Registered Office:1 Churchill Place, London E14 5HP.