One such option that is not widely recognised or used to its full potential in the commercial finance market is the offset mortgage.Offsets are widely used in the residential mortgage market and have been available for some time. They let clients use any funds they hold on deposit, normally earning minimal if any interest, to be offset against the charges on their commercial borrowings. Many businesses hold credit balances from time to time. It’s surprising the effect that even small credit balances held in an offset facility can have on the cost of a commercial mortgage. For example, a client with a 20-year commercial mortgage of 250,000 at base rate plus 2% faces interest costs of 157,875 over the term of the loan. If the client holds an average deposit balance of 10,000 in an offset facility the interest cost drops by 19,019. Of course, this increases the higher the credit balance the client holds. An average credit balance of 40,000 would save the client a huge 65,453 over the period. The impact on the effective interest rate is also substantial. The 40,000 credit balance would reduce the effective interest rate cost from base plus 2% to base plus 0.9%. Lenders release innovative products from time to time and this is a prime example. So why has it not proved more popular with businesses? Perhaps bank loyalty stops clients looking for the best products available. It is now common for borrowers in the residential mortgage market to use specialist brokers to find and recommend products that suit their needs. Surely borrowers in the commercial market should also employ market specialists to ensure they get the best terms available? Perhaps it is the old fear of the hefty upfront broker fees in the commercial market that concerns borrowers. TBMC has recently adopted a policy of no upfront fees on commercial applications. It is now rare that we charge any fee above the arrangement fee charged by the lender on completion. The client has nothing to lose. Offset is only one of the facilities available to specialist brokers and it is rare that a quality broker cannot improve on the terms available to a client from their own bank, which all too often is their only port of call. Commercial borrowers will one day realise that employing specialists can save them thousands of pounds when deals are structured properly. In time, commercial brokers will become as commonplace as residential mortgage or insurance brokers. It’s simply a matter of when.
With the uncertainty over interest rates causing the withdrawal of many fixed rate schemes and a rise in the LIBOR rate, clients must look at their options to cut the interest burden on their borrowings.