Mortgages  

Offset is evolving for the better

This article is part of
Offset Mortgages - October 2014

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.