The Woolwich is heralding its new mortgage, in which interest is calculated on the difference between borrowings and savings, as the product to drive on the industry shift towards flexible mortgages.
The Woolwich believes Open Plan Offset, launched on 1 June, will quickly become its number one mortgage product.
Hillary McVitty, group media relations manager at the Woolwich, said that flexible mortgages now made up 50% of its mortgage business and that the Open Plan Offset was the next step forward.
The building society will not have the market to itself for long, however, and will find itself competing head-to-head with the Halifax, which is to launch a similar product in July through its planned Intelligent Finance (IF) internet and phone banking service.
The Woolwich is offering 6.75% (variable with the figure never exceeding base rates by more than 0.75%), but as yet the Halifax has not come up with any firm figures on its proposed offering.
The Woolwich is also offering intermediaries commission of 0.5% on new mortgages, compared with 0.35% from IF, however the latter is also offering commission on related services such as savings and current accounts.
The Open Plan Offset has a maximum LTV of 90%, free legal fees or £300 cashback plus a free valuation. It has a £500 redemption charge for the first two years and does not require salary to be paid directly into the account.
The Woolwich offering and the proposed Halifax product have many similarities to the Virgin One Account launched in October 1998, allowing overpayment and calculating interest on a daily basis on the total amount borrowed less the total assets held.
This can lead to reductions in repayments, the duration of mortgages and can theoretically result in 0% mortgages. With both products, borrowers can drawdown on overpaid sums, take payment holidays and vary repayments.
Unlike the Virgin One Account, the two new products allow borrowers to keep their savings and current accounts separate, which is something that both Halifax and Woolwich say their customers are keen to keep. Instead, the accounts have virtual links to their mortgage debt.
McVitty said: “We are keeping the savings and current account completely separate so the customer can see them and operate them in the same way they have always done. What we have changed is the way we do our sums.”
She said that the mortgage had big tax advantages for people in higher tax brackets, as interest on positive savings and current account balances is netted off against the borrowing. It would also help people paid monthly to make current account holdings work harder.
Despite the potential savings to customers, the two providers do not expect to lose out, because they anticipate an increase in overall savings and current account business.
The Halifax hopes that its trump card will be the strength of its internet and telephone service, modelled on US businesses.