In the wake of research by Yorkshire Building Society revealing that only 7% of borrowers considered an offset product when taking out their mortgage, it continues to be puzzling that offset and current account mortgages maintain such a relatively low profile.
It could be that there is limited awareness and comprehension about them and how they work. People may think that they cost more or just decide that they want a fixed rate or tracker deal without considering the variations in flexibility between products.
In any event there are, according to First Direct, around 460,000 offset mortgage borrowers in the UK.
Offset mortgages originated in Australia, and, since their arrival in the UK, perhaps the most prominent exponent of their merits on these shores was Intelligent Finance. Of course, that brand no longer offers mortgages to new customers.
The benefits of offset mortgages tend to be that, for the financially disciplined, they provide significant flexibility and can reduce both the overall interest payable and the term of the mortgage.
The media often bemoan the plight of savers given the relatively high inflation rate and the historically low Bank base rate. The vast majority of deposit-based savings lose money in real terms.
In an offset mortgage, savings effectively earn tax-free interest at the same rate as the mortgage, albeit the savings interest is offset against the mortgage interest rather than actually being paid.
For taxpayers, and especially higher rate taxpayers, this is a key benefit.
If the offset also has a current account facility as part of the package – which 29% of them do – so much the better. For many with both a mortgage and savings, an offset mortgage could be viewed as something of a no brainer.
Inflation reduces both debt balances and the value of savings in real terms, whereas using an offset mortgage for savings effectively reverses the negative effects of inflation on a savings pot.
A number of lenders (First Direct and five building societies: Beverley, Marsden, Newbury, Vernon and Yorkshire) will also allow the savings of third parties, such as relatives or friends, to be offset against the mortgage.
Historically offset mortgages have charged a premium over their equivalent non-offset counterparts, but this premium has narrowed over recent years.
Looking at the current interest rates charged for two-year fixed rate offset and non-offset mortgages, from lenders that offer comparable products in terms of rate type, initial rate type, LTV and arrangement fee, the offset version typically charges a higher initial interest rate of between 0.10% and 0.30%.
At the time of writing, there are 27 providers offering offset or current account mortgages and they collectively offer 243 different offset mortgages. The vast majority (229) of them are offset mortgages, with only 14 being current account mortgages.
The following table shows the interest rate types currently available:
| Initial interest rate type of mortgage | Initial interest rate term | Percentage of available offset mortgages |
| Base rate tracker | Two years | 20.6% |
| Base rate tracker | Lifetime of mortgage | 9.1% |
| Fixed rate | Two years | 23.0% |
| Fixed rate | Three years | 11.5% |
| Fixed rate | Five years | 11.5% |
| Discounted variable rate | Two years | 6.2% |
| Discounted variable rate | Three years | 4.9% |
| Discounted variable rate | Five years | 0.4% |
| Discounted variable rate | Lifetime of mortgage | 2.5% |
| Standard variable rate | Standard variable rate | 10.3% |
While there are a wide range of different rate types and initial rate periods, offset mortgages are generally felt to be ‘stickier’ products than traditional mortgages, in that borrowers are less likely to chop and change their offset.
Intermediaries can offer clear added value to their clients, by extolling and explaining the various benefits of an offset and adding them into the mix as an option beyond just deciding between a tracker or a fixed rate and the initial rate term.
As for distribution, more than 55% of all offset mortgages are available through intermediaries, with 21.4% available through brokers only, 34.2% through intermediaries and direct, and 44.4% direct only.
There are a variety of customer types who may benefit from an offset mortgage, including:
• higher rate taxpayers
• those with a reasonable level of savings
• the self employed
• those for whom a substantial portion of their anticipated income is not guaranteed (such as commission); those who may receive a substantial annual bonus
• buy-to-let landlords
• customers who maintain a significant balance in their current account (provided that the proposed offset has a current account facility)
• those paying for their children’s school or educational fees or maybe even for a wedding
Another advantage of the offset model is that the borrower retains access to the savings pot, whereas an overpayment into a traditional mortgage would be treated as a capital repayment.
For this reason investors may also find an offset mortgage useful vehicle to park spare funds waiting to be invested elsewhere.
