It feels like we have been talking about offset mortgages for most of my lifetime. Certainly over the past 10-15 years they have been a core part of the mortgage market, albeit one that remains firmly in the niche category.
Every so often, there does appear to be a groundswell of market chatter about whether offsets will eventually break out of their shackles and make it truly into the mainstream, but – for a variety of reasons – this has yet to materialise.
Interesting, given the readership of this publication, anecdotal evidence suggests that advice – and take-up – of offset mortgages has been much more prevalent among IFAs and their clients than in other sectors. Advisers tend to see the innovation within the product and are much more likely therefore to recommend the offset option particularly to high-net-worth clients who may have sufficient surplus cash to gain far more benefit from it.
After all, if you have considerable sums of money currently doing little and earning little interest within a cash savings or current account, then using that money via an offset to reduce the amount of interest charged on your mortgage would seem to make financial sense. Plus, by doing this you can potentially pay off the mortgage balance sooner than via a simple, straight mortgage product.
In a low interest rate environment, as we have experienced for nearly the past decade, one can understand why an offset mortgage might seem much more attractive to those with savings. Let us not forget that we do not have to be talking about hundreds of thousands of pounds here; there is a benefit to be gained with much lower sums, that is if the client is willing to set this within the offset product and not aim to earn interest on it.
Looking ahead, even with inflation levels rising, governor of the Bank of England Mark Carney recently said that the Monetary Policy Committee would be willing to stomach rising inflation without any recourse to increasing bank base rate for longer than the committee would have done historically. To my mind, that appears to be setting out a low interest rate environment for some time to come. Most economists and commentators appear to believe that BBR, in particular, might only be raised slightly, if at all, throughout 2017 and 2018. This being the case, it does raise the attraction of offsets for those who, quite frankly, are looking at small-fry cash savings rates.
With offset mortgages it is also now the case that there are far more lenders, offering far more products, than we might have seen before. As an adviser, if you have not looked at the offset options in the market for several years, you might be surprised to see the growth in numbers, with many more lenders considering offset-type options as a niche area because competing on price for standard residential mortgages is not achievable.
Those lenders who led the way initially with their offset product propositions are still very active in the market – including Scottish Widows, Barclays, Coventry Building Society and Accord. However, I would draw attention to a number of, shall we say, smaller building societies that now also offer offset solutions. Indeed, many of them are leading the way in terms of pricing and criteria. Ones I would point out are Beverley Building Society, Hinckley & Rugby Building Society, The Family Building Society, Vernon Building Society, and Melton Mowbray Building Society. Indeed, the Beverley appears to be competing hard on price at present with its two-year discounted variable rate offset product currently coming in at 1.58 per cent.
Advisers should, however, be aware that with some of these societies the client may need to be within the geographical field of vision for the lender to take them on. The Vernon, for instance, will only lend within a 25-mile radius of Stockport. Another point to be aware of is advisers' dealings with these lenders.
It may be that you have not dealt with one of the smaller societies before and this may make you somewhat uncomfortable. It should not, but there is no cause to worry about this because there are specialist packagers active in this market who have access to these lenders and have a strong relationship with them. Referring your clients to them might well be the best option in order to take advantage of their case expertise.
Overall, there is no doubt that, for certain client types, the offset mortgage should be a consideration when they come to look at their product options. As mentioned, it may well be that you have clients who are simply unhappy with the punitive interest rates offered for easy access accounts. Or there may be higher rate taxpayers who should also consider offsets as taking this option means their savings will attract no interest and they will not have to declare this as taxable income.
Self-employed applicants can also use money set aside to pay their tax bill to offset and landlords can have their rental income paid into a savings account linked to their own residential offset, which can help reduce their own mortgage interest.
Some lenders allow business accounts to be linked to offset mortgages, but generally the name on the business account would need to match the name on the mortgage so it would normally be sole traders or partnerships that could do this.
Finally, some lenders also allow family members to link their saving accounts to a mortgage of a relative. This can be useful where parents want to help out children with paying a mortgage debt, but not actually gift them the whole amount.
Overall, and certainly for advisers, I suspect there will be some clients within your client bank that, at the very least, should be considering the use of an offset mortgage. In years gone by, the discrepancy in pricing between offsets and normal mortgages was seen as offputting to borrowers focused on monthly payments. However, pricing differentials have narrowed and the money that can be saved over the longer term should also be taken fully into account.
Also, the perceived complexity of offsets is not really there any more – this should be easily understandable for all and therefore an option worth exploring, particularly in a low-interest rate environment.
Christine Newell is mortgages technical director at Paradigm Mortgage Services
Key points
Now is a good time to take out an offset mortgage due to low interest rates.
Many building societies offer offset mortgages.
Self-employed people can also use the money set aside for their tax bill against their mortgage.
