Mortgages  

Offset comes of age

This article is part of
Offset Mortgages - October 2014

Once seen as a potential revolution in the mortgage market, offset mortgages are now firmly part of the Establishment. The offset mortgage in its truest form emerged from the flexible mortgage offerings from providers such as Standard Life Bank and, of course, the current account mortgage.

The Virgin One Account broke new ground in offering an all-in-one package that claimed to be all things to all men. It offered the first fully integrated flexible mortgage, where the current account was built-in and borrowers were able to pay in and draw back on their cash/mortgage.

Other than the interest rates being on the high side, the One account did suffer a touch from borrowers being uncomfortable with the concept and how it worked. The fact that the product was structured as a current account with a huge overdraft facility (otherwise known as the mortgage) meant that some felt unable to keep tabs on just what was savings and what was the outstanding debt.

That left a gap that offset mortgages could fill, ultimately becoming the preferred product choice within the flexible mortgage market. Tweaking the concept of the current account mortgage slightly saw borrowers being given the ability to keep their finances in the separate pots – current account, savings account and mortgage – but benefit from the credit balances reducing the overall interest bill.

The initial launches from Woolwich and Intelligent Finance were hailed as a new dawn as the mortgage market entered the new Millenium. There has been a lot of water under the bridge since then, of course. To put it into context, Woolwich was also launching some of the first mobile banking functionality, accessed through WAP technology on a Matrix-style phone so large that it could now be classed as an offensive weapon.

So how has the offset mortgage market fared, and what has changed since the product first hit the shelf?

The challenge for offset was initially to get the concept across to consumers. Awareness of offset mortgages was good, and borrowers, on the whole, had a basic understanding of the benefits. However, the next hurdle was to make the interest rates look attractive to the mass market in what was a very competitive marketplace.

That was a big reason why offset deals have in reality only ever managed to take a minority stake in volume terms and have largely been viewed as a product suited to more sophisticated borrowers.

Even now it is important for borrowers to really think about how they will use the product, and whether they will have a savings balance large enough to more than account for paying a higher interest rate. They are still of little value to someone who has a large mortgage, but only a small savings and current account balance, which quickly erodes back to zero as the month wears on.

Lenders have recognised that a broader product range with better rates would help improve their appeal, something worth doing given the expected improvement in retention of the borrower. Making fixed rates a viable offset option is a big step forward, when previously the desire for budgeting security was mutually exclusive from offsetting functionality.