Offset’s use by borrowers for tax efficiencies is highly relevant today and will be for the foreseeable future.
However, with a continued low base rate and low savings rates, it is important to evaluate the other benefits attached to offset.
Defaqto recently highlighted that offset can offer an effective savings vehicle in a low interest-high inflation environment.
The savings dilemma is a common one, especially as there appears to be no sign of a rise in Bank of England base rate on the immediate horizon.
Yet, while many savers continue to do little to use their savings, we should assess the real implications of this and what they actually want.
Research suggests that savers have missed out on £72bn in interest in the 28 months after the Bank of England slashed the base rate to 0.5%.
During that time, the average savings account interest rate was just 0.79%, according to Moneyfacts, equal to £21bn interest on the total £1.12trn held by savers in cash accounts.
Yet, if rates had remained at the 3.44% average of the 28 months before base rate dropped, savers could have pocketed £93bn – some £72bn more.
These are startling statistics and help illustrate just how important it is to really make the most out of each and every pound of savings.
However, the UK Savings Council has revealed that 45% of people are not sure of the current interest rate on their primary savings account. Of the 55% who said they were aware of their rate, only 29% knew what the exact rate was.
This is even more surprising because, when quizzed on which three features were critical in their choice of account, 48% said the interest rate, while 45% highlighted the amount of interest being earned by the savings.
These findings suggest that many consumers have not got to grips with the low savings rate environment and should scream opportunity for intermediaries.
Look to pose such questions to clients and use the answers to illustrate how much an offset mortgage could potentially save them in monthly repayments and tax, and how these savings can reduce their mortgage term.
It may also be useful to pick out some of the ‘best’ available savings rates to compare and underline just how much harder offset will make client’s savings work for them.
However, it is vital to underline that the benefits attached to offset are not just restricted to low interest rate setting.
With household budgets being increasingly squeezed, people have to think more about their finances and pay much more care and attention to them.
This is where offset can be utilised, but in order to advise on this it is important to realise what consumers think about the present and the future.
State of the nation research undertaken earlier in the year suggests that the main financial factors on people’s minds are:
- Reducing debt
- Cutting back on spending
- Trading down – groceries, cars, clothes holidays
- Taking from the future to pay for the present – having a pension holiday
- Tighter financial management, including use of spreadsheets to manage budgets
- Looking for maximum value for money
When money is tight, people become even more time poor, but there is evidence that they are still looking for greater control.
Flexibility is a key advantage of offset, offering the ability to change payments to suit lifestyle and financial profiles.
In understanding clients’ needs, brokers can help them reap the rewards of offset and plant the seeds of a lucrative long-term relationship for both parties.
The first step to achieving this is by understanding how people view offset.
It appears that some people do not connect offset with the need to find a home for their savings, despite many having the appetite to maximise savings in the current economic climate.
In addition, some people find offset too challenging a concept and its flexibility can actually create trepidation on how best to utilise this.
How can brokers overcome these concerns?
It is evident that clients need reassurance that their savings will be secure and accessible, and not feel like they are burdened with a huge debt on their current account.
- Make communications simple and straight forward – more than three points makes the product seem more complex
- Use safe and easy to understand words, such as reduce, control, safe, choice and instant access
- Advice must include the two elements mortgages and savings – only talking about savings means that mortgages becomes the catch of being able to get this product and makes mortgages the ‘dirty word’
- Avoid negative words, such as hassle, risk and tax, even when preceded by something positive, such as less hassle or low risk
Offset is not always the easiest conversation to have, but to make this easier it is vital to get to know clients’ present and future financial aspirations, as well as having expert knowledge about offset.
A combination of such knowledge infinitely boosts the chances of the benefits attached to the product being maximised.
It also helps develop a long-term client/adviser relationship rather than just one that lasts for length of the mortgage transaction.
