Offset mortgages: why are they in decline and how can they regain popularity?
National Intermediary Sales Manager
Offset mortgages can be a good option for borrowers, particularly in the current market environment. With inflation expected to hit 2.7% this year, some may find that their money loses its value if the interest rates offered by their savings accounts don’t exceed or at least match the level of inflation.
With offset mortgages, the amount of money people could save by paying less in interest on their mortgage is likely to exceed the amount that they would be able to earn in interest with most savings accounts, offering an effective way to beat inflation.
Despite these potential benefits, offset mortgages only represented 1% the mortgage market in 2016, down from 5% in 2011. Additionally, only four lenders offer offset mortgages in the intermediary space, leaving brokers and customers with few options.
Why are they declining in popularity?
This decline could be explained by a number of factors. One of the most significant is borrowers’ general lack of awareness or understanding of offset mortgages. Accord Mortgages research revealed 12% of brokers admitted to having limited knowledge of this type of loan.
Additionally, offset mortgages often have higher rates than standard fixed rate accounts, causing many to overlook them as an option. However, borrowers may benefit more across the life of their offset mortgage, making it crucial to highlight the long-term benefits when speaking with clients.
It can often be beneficial to review offset mortgages as an option in the wider context, by also considering savings rates. This can be problematic for brokers due to regulation constraints when advising on savings rates.
What can brokers do to buck the trend?
There is a business opportunity for brokers to recommend more offset mortgages, while also broadening the options they present to their clients. Kelly Stowell, Accord’s Business Development Manager in London recently noted that there’s been an increase in the number of brokers placing higher loan size offset cases (around the £1.5m mark). Under the personal savings allowance those on incomes over £150,000 don’t earn tax-free interest on their savings, so an offset provides a more tax-efficient option.
Though many clients might favour earning money over saving money, it is important to highlight how different options could benefit them in the long term. Brokers can use an offset calculator to calculate the amount the client would save to see if an offset mortgage would suit them better.
Brokers could help their self-employed clients understand how the flexibility and tax efficiency of offset suits their circumstances. One of the other benefits of an offset mortgage is that it can help borrowers be mortgage free sooner, meaning they would have a big volume of cash freed up which they could put towards their pension.
Despite this, research from the Yorkshire Building Society Group found that almost a third (29%) of the self-employed workers questioned were unaware they could reduce the interest they pay on their mortgage by linking their home loan to their savings. Additionally, only 10% of those who said they were familiar with this type of home loan actually had an offset mortgage, despite the majority (63% of all respondents) indicating they would like to pay off their mortgage as soon as possible, or they want to make their money work harder.
This could present an opportunity for brokers to highlight a product many may not otherwise have been aware of, potentially savings their clients’ money.
What can the industry do?
The industry also has a role to play by bringing more products to the table. This would provide customers with more choice while also boosting competition in this area of the market.
Accord research found that a majority of brokers (94%) believe a better range of tools from lenders could help them to dispel client misconceptions about offset mortgages. The top three ways to improve understanding of offset mortgages were introducing better online tools, providing more case studies and detailed key facts illustrations (KFIs).
It is crucial that lenders provide more information and work to make these products easier to understand for customers so that more people can benefit from them.
At Accord, we’ve worked to improve our services in this regard by making all our offset accounts accessible online. Additionally, all of our BDMs have undertaken thorough offset training to support brokers. We will continue to develop our offering in this area and we hope more lenders follow suit.
National Intermediary Sales Manager