It seems a long time since the first current account mortgage was launched. Much has changed in the market since then. We’ve seen the dramatic growth of the adverse market coupled with spiralling consumer debt. Income multiples have risen from 2.5 x to 5 x income and buy-to-let has boomed. But the economic and cultural conditions make this the perfect time for lenders to revisit the merits of current account and offset products.
At the core of these products is a model that allows clients to use current savings to offset against borrowing and reduce the interest charged. It also encourages them to pay off their mortgages earlier by allowing overpayments that can dramatically cut the amount of interest charged. Borrowers can also borrow back any overpayments, giving them financial flexibility.
The time may be coming when borrowers will need to repay debt, and the flexibility offered by these products will be a godsend.
At a time when lenders are struggling to keep hold of mortgage borrowers it should be noted that these products have a good record in customer retention. Research into retention rates on current account and offset products finds that they retain their customers over a much longer period than any standard product.
So their use, if coupled with the retention strategies of lenders such as Halifax, could start to reduce the amount of customer churn seen in the market.
This might also provide an opportunity for established prime lenders to fight back against new entrants that securitise their assets, as these products are more difficult and expensive to manage.
As far as brokers are concerned, they get a product through which they can build a long-term relationship with clients as product features have to be explained thoroughly and reviewed on a regular basis.
This could lead to genuine trail commission schemes whereby intermediaries are encouraged to contact their clients on a regular basis to review their financial position. This would also provide more opportunities for intermediaries to sell additional products when annual review time comes around.
These products allow consumers to manage their financial affairs more effectively, are more profitable for lenders and give intermediaries the opportunity to build long-term relationships with clients. At a time when lenders are struggling with profitability, customer retention and product innovation, it’s time to look at these past products for future inspiration.
The mortgage market is in a constant state of change. We are about to move into a period when lenders will no longer be able to afford previous product subsidy levels. As a result they will need to explore alternative models to retain customers and boost profitability. Without subsidies, products will need to be sold on features. The current account and offset product model provides just the features that clients will value.