Competition in the offset-mortgage market has slumped to a five-year low, leading to fears that borrowers could start to see rates on these products start to rise.
An offset mortgage links a borrower’s savings to a mortgage, and it can be a good way to reduce the size of an home loan. A borrower pays interest only on the net amount once the savings have been subtracted from the outstanding loan amount.
However, despite rapid growth in the number of these products on the market since 2010, there has been a marked fall in the availability of offset mortgages over the past 12 months.
There were 210 such deals available at the end of 2010, and that figure had risen to 370 by this time last year, according to the number-crunchers at Moneyfacts. Today that figure has plummeted to 233.
The good news is that interest rates haven’t yet started to rise. The average fixed offset-mortgage rate in February 2015 was 3.25%, and that has fallen to 2.48% today. The average variable offset rate has fallen from 2.94% to 2.75% over the same period.
But with rates often driven by competition in the market, the reduction in the number of providers offering this type of loan could signal that a less competitive era in the offset-mortgage market is on the horizon.
“Offset mortgages were once seen as the ultimate flexible product as they allowed borrowers to reduce the interest paid on their mortgage while simultaneously having instant access to their savings pot,” said Moneyfacts’ Charlotte Nelson.
“However, it’s disappointing to find that the number of offset products has now fallen to a five-year low.
“Sadly, offset products are yet another casualty of the poor state of the savings market. Providers just do not need the extra cash from savers, and the savings linked to offset mortgages are no exception. As a result, lenders have pulled some offset products from the market.”
She added: “This may be the start of a continued decline in offset mortgages: the new personal savings allowance coming into place in April may make the offset mortgage redundant for many borrowers, particularly if they had previously opted for one for tax-efficiency purposes.
“The new rules will mean that savers can earn £1,000 tax-free; many borrowers may therefore find that their savings are better kept elsewhere.
“The sad truth is that the current trends in the savings and mortgage markets are likely to lead to the steady diminishment of offset mortgages, which means that a flexibility once enjoyed by many may gradually disappear, with mortgages becoming more rigid as a result.”