DF: We looked at our targets for offset two or three years ago, when the CML said it represented somewhere between 6% and 9% of the market, and we thought that was quite small. We set out our aspirations at around 15%. Last year, offset accounted for around 16%, and it is currently near 23% of the business we do. That has to be put in context – there is not actually much difference from last year in terms of the numbers that we do. We are pretty happy with that, but think there are future opportunities out there for further growth.
DS: It is the financially savvy clients who will raise the issue of offset. It is those who understand the product that will go for it. The majority of the offset deals are available on a tracker basis. With the pricing of trackers at the moment, they are something of a ticking timebomb. Trackers are not an impossible sell, but a potentially dangerous one.
MH: With offset, the effective offset rate could be zero. Clients see the headline rate, but that does not help them at all. People say they love the offset calculator, but until you put your own finances in, it might not be the most instructive thing to use.
DF: Some of our best offset salesmen are those who have offsets themselves. Once they know how it works, it helps them sell it. When you look at it properly, it does have quite a reasonable effect on either the term of the mortgage or the payments.
RC: The calculators all run slightly differently – you have to understand how each one works.
DH: The calculator will just become a marketing tool. They will never all be the same, but it is the broker’s responsibility. They have to understand the product that they are talking about.
DS: Woolwich did allow families to use the product to offset and help their children buy a first property.
DF: Unfortunately, it had a really low uptake. If you look at the viewpoint of the parents, do they really want to hand over £40,000-£50,000 to their kids in cash for a deposit? No, because they do not know if the kids will blow the lot on a holiday, or whatever. But having a product where they have control of the capital but the children benefit from it, I still think would be a good idea.
RC: We find parents want to invest with their children. In this context, with savings getting 0.1%, they look to invest together and then go their separate ways further down the line.
DH: You can get to the point of being too clever. Do people not buy offset more because it is complex enough? To increase its market share you need people to understand offset – people have been using credit not savings. If you have got a differential, it does make a difference, but if you have not got a lot of cash, you might want to go for something cheaper.
RC: We always push the tax-free savings concept, as it is very easy to explain. It is always one of the biggest benefits, for the higher taxpayers, certainly.
DS: The effective rate of interest on any savings is a great way to convince people to pay into an offset deal, but I always feel it sells much better face-to-face. For someone to do it all over the phone is not impossible, but there are some limits to what you can do.
DH: I disagree, you can definitely sell it over the phone. You should not underestimate the borrower – they do have some idea of how it works, and it is as much about picking the right product as anything. They may already have done a little bit of shopping around.
DF: We do not see a huge difference between brokers that sell it directly or those that do so over the phone. It can be sold equally well.
RC: The crux is the cash argument. It is the speed of the process in this market – not many people have £200,000 in cash, but for those that do, it is great. You can keep recycling your money, pay the mortgage down, or can use a chunk of it to start building a buy-to-let portfolio, for example.
DF: We do not offer fixed rate offsets, and we never have done, but that is where the market is at the moment. It has never been one of the angles we have come in at. But it is something that we will look at.
DH: It is a real positive sell, offset, at the moment. Borrowers are looking around, because everything is so uncertain, and this is something more long-term that provides great value.
DS: Clients are not asking for two-year deals – they are being sensible, and know that things will not work how they used to. Offset commands great loyalty, and we get lots of clients that embrace offsets and use them proactively. It gets a good report from us, because we do not have to keep moving the borrower around.
MH: I do not understand why brokers cannot sell offsets. It is the perfect product for cross-selling – because the client has more money, you can look at their protection needs, for example.
DF: With IFAs, we find that they worry less about looking to rebroke the client every couple of years, and take a more holistic approach. That is not to say that the brokers look to switch them around – sometimes it is just good advice.
RC: It is a product that is great for higher-rate tax payers. If someone has £5000 in savings and wants to borrow £200,000, then it makes no sense to get into an offset deal, but if they are wealthy, or are paid a bonus, then it is great.
DH: How things develop with criteria will be very interesting, as these products are perfect for those who earn a bonus, but for them to get to the products, the criteria needs to be flexible.
DF: The criteria will not get easier, they will certainly get harder.
MH: I was at an event recently, and sat next to a broker, and they said they do not do any offset business because they do not understand it. They will not do it.
RC: That is a hangover from the market of ten years ago. Offset complements the holistic service. Transactional brokers will have a very difficult time in the next year or so.
DF: We are just about to launch a new calculator into the market – illustrating how the deal works is a wonderful thing. Obviously, you have to make clear that it is not going to be 100% accurate, but rather that it is more of an illustration.
RC: We always use the Intelligent Finance calculator, it is completely malleable. You just have to get people into the mindset of playing around with it. They will then buy into the concept.
DS: And it helps clients to become more financially savvy. They will look at their money on a month-by-month basis, rather than just sit back and wait for the statement.
DF: The margins are fine, but we have to take a vanilla approach. You do not have to offset everything, but we have seen that some customers do not offset anything at all, and that is what worries me. Somebody has been sold an offset product but has not activated it. That means it was not sold properly in the first place. We did look at tiering proc fees to encourage activation.
MH: We do that at the moment.
DF: Exactly, but unfortunately for us, it would be tiered negatively, so you would only get the current full fee if the deal is activated, rather than any extra.
RC: If penetration is not what it should be, why not look at trail payments?
DS: Intelligent Finance used to have a trail. It might not get brokers excited, but it would be an additional sales pitch for the BDMs.
DF: It is something worth looking at. One of the difficulties we would have as lenders is that it is not an easy decision to make, it would require a strategic investment of capital, and the money is just not there at the moment. It will not happen in the short term.
DH: Brokers will all look towards the lenders to develop products, not kick off about how they get paid.
DF: But it has to be part of the debate about how this market develops. n
