Seated from left: Andy Pratt, chief operating officer, Alexander Hall; Brian Murphy, lending manager, Mortgage Advice Bureau and Richard Adams, managing director, Stonebridge Group
Standing from left: David Finlay, managing director for mortgages, Barclays; Jonathan Cornell, industry consultant; Andrew Montlake, director, Coreco; David Hollingworth, mortgage specialist, London & Country and David Copland, managing director, Pink Home Loans
Ten years ago when the offset mortgage was launched expectations were high. With borrowers able to use their savings to reduce the interest they paid on their mortgage, many saw this as the future for mainstream mortgages. In 2005 Datamonitor reported that while offset only accounted for 5% of the overall mortgage market at the time it expected that by 2009 it would hit 30%.
Sadly, in 2011 offset accounts for just 7.5% of the market. If offset is the new mainstream it’s got a long way to go. So how can this situation change?
Clearly, brokers and customers need to be better educated about its benefits. Barclays’ current television advertising campaign, voiced by comedian Stephen Merchant, focusses on the benefits of offset mortgages and aims to promote understanding of the product.
But to debate what else can be done to improve the take-up of the product Mortgage Strategy, in association with Woolwich, invited the great and the good of the industry to a round table discussion.
Q. WHAT NEEDS TO HAPPEN FOR OFFSET TO BECOME A MAINSTREAM MORTGAGE PRODUCT?
David Finlay: I would argue that it is a mainstream product but it just needs a lot more focus than it is getting. The market share for offset is less than 10% but the Council of Mortgage Lenders’ figures for Q2 2011 show an 18% uplift in offset sales, albeit from a low base. It could be confidence holding the product back – either brokers not being confident about understanding and selling the product or consumers lacking confidence in understanding how it works and its benefits. There’s a huge amount of work to be done on educating businesses and consumers. Barclays has recently been advertising on television to demystify the product.
Andrew Montlake: In the high net worth market we operate in offset is a mainstream product and we always talk about it as part of our armoury. I did some research on Twitter about offset and lots of brokers say they mention it to clients but that lenders aren’t promoting it enough, with the exception of Woolwich. Offset is also seen as a complex product and brokers have tended to mention it without going into detail and calculating the potential savings to be made.
Brian Murphy: There is also a pricing issue as clients want simple, straightforward products. If you have a basic two-year tracker at one price and a two-year offset costing more most clients, unless it is properly explained, will opt for the cheaper option. I agree with the point about price differentials. We see more offset deals sold among experienced advisers who are used to customer interaction and explaining the benefits, so price becomes less of a factor. They can bring in a wider range of product features and explain the benefits. Many new brokers are more concerned with capturing clients and getting the deal done so probably sell more around price.
Q. IS A LACK OF AVAILABILITY AN ISSUE WITH OFFSET?
Jonathan Cornell: Definitely – for instance Halifax doesn’t offer offset deals and you have to go to Scottish Widows to get a deal with Lloyds Banking Group. With half of all customers going direct to lenders many won’t think to pick up the phone to Scottish Widows as they would with Halifax. The banks that offer offset have invested heavily in technology and those that haven’t will find it a breathtakingly expensive process to offer them now.
Richard Adams: It is a product that needs to be advised on and the problem for brokers probably lies in knowing their clients and fact-finding. If you don’t have all the information you can’t spot the opportunity for offsets and then it comes down to the cheapest fixed rate or tracker. I suspect there is also a fear of losing a remortgage opportunity later on.
Andy Pratt: Lenders have started to make offset a niche product with some of them labelled as offset lenders. It should be an add-on feature for brokers to mention as they explain a number of products. Positioning it as an add-on would help but systems limit how many lenders can offer offset, so it will never be a large section of the market. It’s a great product but there needs to be more broker education.
There isn’t an immediate impact and if you’ve never seen it operate you won’t be aware of the benefits two or three years in the future. There is more that lenders could do to demonstrate these benefits to brokers but it’s also down to individual firms.
Finlay: Those mortgage sellers who have an offset deal themselves are converted.I would love to see every broker sit down and assess what it would do to their own mortgage and how it would benefit them.
Adams: I suspect lenders’ volumes come from a small segment of the market, with some brokers using offset often and some not at all.
Q. WHAT MISCONCEPTIONS ARE THERE AROUND OFFSET MORTGAGES?
Montlake: There is a perception that it is a rich person’s mortgage.
David Copland: It’s a disciplined person’s mortgage. I don’t necessarily think it is for rich people but that is the perception.
Montlake: Some journalists believe offset is a tax avoidance loophole that could be closed soon, which doesn’t help.
Finlay: Many people don’t realise that it’s instant access savings. If you’re a 40% taxpayer you have to be earning the equivalent of more than 5% interest to get the equivalent rate on an instant access account. Those deals are simply not available so it’s a fantastic product for savings.
Montlake: In today’s savings market it should almost be the first thing you discuss with clients.
Finlay: The current climate is to encourage borrowers to pay down debt but there’s a counter argument that with an offset you want to keep your debt as high as possible.You will never get access to money this cheaply again so why would you want to pay down your mortgage when you can offset it.
Adams: Offset should be an aspiration of middle earners because you could argue it is not relevant for low earners due to tax reasons. That is the marketing area to target because it is an aspirational product.
David Hollingworth: Broker confidence is linked to consumer confidence and if clients look confused about offset brokers fear they might lose them. Brokers believe that if they covered the option and the client seems uninterested it is better to move on or risk losing them to another broker who will just offer them the simplest, cheapest deal. Clients don’t move current accounts easily but the time is surely right, especially as offset pricing has improved.
Murphy: Conceptually it is right to maintain a certain amount of debt but public sentiment is changing. We are a nation with massive debts and the government is telling us we must reduce this so linking savings with the mortgage is a subtle way to do that.
Adams: My brokers tell me clients don’t have any savings but we’ve got the lowest mortgage payments in history, so the money must be going somewhere. I suspect it is because we are not asking the right questions.
Montlake: When they buy property most people spend all their savings but for remortgages it can be useful.
CAN THE OFFSET SECTOR GROW ITS MARKET SHARE?
Pratt: Until bigger players such as Halifax start to offer offset I can’t see it taking more than 20% of the market, so there are limitations.
Copland: Offset should have a market share of around 15% rather than under 10%, which is where it is at the moment. It’s a specialist product for the right type of person, not necessarily high net worth individuals but disciplined and educated people.
Finlay: The share of Barclays’ book that is offset stands at about 12% through brokers so we’re above market share. When you take Barclays UK retail division as a whole the percentage of mortgages sold as offset is actually higher.
Murphy: It doesn’t surprise me that direct sales have a higher share for offset deals because sellers have access to a current account and savings so they can use actual numbers to demonstrate the benefit.
Hollingworth: It’s easier if clients already have their current account with a bank and it can simply be transferred to an offset.
Finlay: Intermediaries sell more deals by number but less as a percentage of the total.
Adams: Does Barclays view it as valuable for liquidity through instant access?
Finlay: Absolutely. It’s not a key vehicle for bringing in capital but it helps. We’re essentially retail funded in our lending.
HOW CAN BROKERS USE OFFSET TO ENHANCE CLIENT RELATIONSHIPS?
Finlay: If you have an offset with Woolwich you get a statement every month showing what is in your account, how much you have saved so far and how much you have saved in a year. It’s nice to look at and works well in highlighting the benefits of offset.
From a broker perspective it provides a good opportunity to call clients to ask how much money they have saved and enhance the relationship by highlighting the benefit of the advice. It may present other opportunities by demonstrating the good service provided but, as mentioned earlier, brokers sometimes opt for the two or three-year deal so they can retain a remortgage opportunity.
Copland: Brokers can still talk to clients about protection and other products. I think the term of an offset mortgage should be much longer and brokers should hold a stake in the mortgage through methods such as trail commission. It came into the market when lenders first launched offset but it was probably ahead of its time whereas there is more discussion about it now. I would fully support introducing trail commission on offset, perhaps after the two-year discount period.
Cornell: If you look at investment advisers, trail commission has a dirty name. It is good in theory if consumers get some benefit such as an annual review but the danger is that we sell a deal and then get paid for doing nothing.
Adams: We have targeted general insurance purely for the trail commission. When GI came in it was all about upfront commission but it didn’t sell well and now opinions have changed.
Copland: More brokers charge fees now so there is not necessarily the same need for upfront proc fees and trail commission can help build value in your business.
DO ENHANCED PROC FEES MAKE ANY DIFFERENCE TO OFFSET SALES?
Finlay: No. In 2010 we took a 33% share of the offset market and that was the year we reduced the proc fee as we felt it was a mainstream product and not that much more difficult to sell than a tracker or fixed rate deal. Experience shows higher proc fees don’t lead to increased sales.
Cornell: If brokers are concerned about not being able to remortgage in the future, paying a higher proc fee could assuage that. Lenders must know client retention figures because borrowers remain on offset trackers for a long time.
Finlay: In principle offset customers have considerably longer mortgages than traditional residential mortgages.
Cornell: So there could be a higher fee or trail commission.
Montlake: I’m uncomfortable with offering higher commissions that encourage one product to be sold over another.
Copland: But I would like to see a shared version of trail commission so if a client goes into arrears then the commission stops. It would be a tripartite relationship between lenders, brokers and clients.
Finlay: I imagine lenders will look at trail commission at some point as it’s being discussed more and more. I don’t think it’s imminent because of the investment it would require.
ARE BROKERS DISCOURAGED FROM OFFERING OFFSET BECAUSE OF A LIMITED OPPORTUNITY TO REMORTGAGE BORROWERS LATER?
Pratt: It’s a block in brokers’ minds.
Montlake: There needs to be longer fixed deals for offset.
Copland: It could be split with 50% of the deal as an offset mortgage. There is no chance of a client repaying half the mortgage on, say, a 10-year deal but they still retain all the benefits of an offset and protection against interest rates rising.
Montlake: Having it as an add-on to products is a good idea and other lenders do this. A price differential of 0.2% more on offset is about right and a lot easier to justify to clients.
IF LENDERS STOPPED MARKETING OFFSET MORTGAGES WOULD THERE BE A FALL IN THE NUMBER OF PRODUCTS TAKEN OUT?
Hollingworth: If the money was channelled into the product it could be priced more cheaply.
Copland: Without marketing it would be a case of out of sight, out of mind. If lenders did not promote offset mortgages at all brokers could revert to their old ways and not sell it, so it’s important that promotion and training is maintained.
Finlay: Woolwich is considering doing some training where we go to distributors, talk to their advisers and give a presentation on how it works. At the moment we have large forums but they don’t work as most people have a snooze, a sandwich and walk away. We can do things on a one-to-one basis but we don’t have the resources to do it widely. We will try to use technology more.
ARE THERE CURRENTLY ANY INNOVATIONS IN THE OFFSET MARKET?
Finlay: One of the things I’ve been championing at Barclays is moving back to an ’offset together’ proposition. It would allow the bank of mum and dad, an associate or family member to offset their balances against someone else’s mortgage. As a parent who wants to help my children I also want to have some checks on them and not just hand the money over – this is a good way to do it.
I am also examining if there is any way we could bond the savings pot and treat it almost as a deposit that could be used for first-time buyers. It takes them on to a lower LTV and maybe allows more people to access the mortgage market than currently.
Montlake: I think that is an excellent idea.
Hollingworth: You would have to use a bond to make it work rather than simply bolting on the parental account to help the child.
Cornell: There could be a problem when parents want their savings back though.
Finlay: That’s why it needs to be bonded for a period of time. If we did a five-year offset product and bonded the savings for five years then, although there is a debate after five years, as long as everyone knows the rules then that’s fine.
Montlake: It is effectively what Newbury Building Society offers. It has a 95% LTV mortgage with parents putting in a 20% deposit to bring it down to 75% LTV. I think it also has an offset facility.
Hollingworth: There are a few lenders using the concept of a bond but if you are offsetting as well then that could be an additional bonus.
Murphy: The Newbury deal charges its rates at 75% LTV but it will also allow borrowers to pay the equivalent of a higher 95% LTV rate if they can afford it. This allows borrowers to make overpayments every month and reduce the term of the mortgage. By repaying more quickly it allows the parents to move away sooner.
Finlay: So from a capital perspective Newbury treats the deal at 75% LTV but from a payment perspective it treats the deal as a 95% LTV mortgage.
Montlake: The thinking is that the quicker the balance is reduced the better.
Murphy: And the borrower gets some equity sooner.
Hollingworth: I think it is good to offer that choice of reduced interest rate or quicker repayment of the mortgage.
Finlay: I will keep championing this point.
HOW WILL REGULATORY CHANGES TO INTEREST-ONLY AFFECT OFFSET?
Cornell: There are people who want interest-only and those who want repayment and it’s not necessarily specific to flexible deals. It could be argued that interest-only makes more sense with offset if you are keeping your payments high and reducing your capital. In terms of regulation there are some brokers who fear the suitability letter justifying why they sold an offset will become longer and longer. There are clients who tend to complain after the event, asking why they didn’t get the cheapest deal.
Brokers can explain how the client wanted an offset but they often forget the detailed conversations. If brokers simply do their research and offer the cheapest deal then they are slightly safer.
Hollingworth: You could argue whether offset is a repayment method in its own right for interest-only.
Adams: You have to be able to judge whether the client is sophisticated enough to manage the mortgage. If they don’t do that then the adviser will be blamed.
Copland: Advisers need to continue their reviews on interest-only deals. There are plenty of people who get to retirement and still have no repayment vehicle in place. You could have the same situation with offset mortgages as you could take out a capital and interest mortgage but it ends up being effectively interest-only because you keep borrowing the capital.
Finlay: Historically the majority of offset deals have been for interest-only.