Strong growth in offset mortgages

New research published by the Council of Mortgage Lenders has revealed strong growth in the number of people opting for an offset mortgage.

During 2006, 170,000 offset mortgages were taken out, worth £29.3 billion - equivalent to 7% of all new lending. And, the year-on-year growth of offset mortgages between April 2006 and March this year was 49% (by value) - compared to just 15% for non-offset lending. Offset mortgages combine a mortgage and savings in one account, and offer borrowers a number of advantages, including:

the option to make on over-payment or an under-payment on the mortgage;

lower total interest payments and a shorter mortgage term because the interest is charged against a lower mortgage balance;

any savings the borrower has will earn a rate of interest similar to the mortgage rate, but are not subject to income tax; and

any savings in the borrower's account help to reduce mortgage interest costs, which helps mitigate the effects of interest rate rises on monthly mortgage payments.

Offset mortgages also hold a number of advantages for lenders. By requiring borrowers to hold both a mortgage account and savings account with the same firm, offset products help lenders to retain customers.

The research also revealed that the majority of offset mortgages are sold through intermediaries. Over the past two years intermediaries have seen year-on-year growth of offset products increase by more than 100% in some months, and by the end of last year intermediaries accounted for 60% of offset mortgage sales by value, compared to 45% in April 2005.

The profile of a borrower that opts for an offset mortgage is slightly different to other borrowers, according to the research. The average age of an offset borrower is 41, and the product remains most popular with people remortgaging.

Author of the research and CML statistician Phoebe Zhang said: "Today's research reflects the dynamic nature of the UK mortgage market. Mortgage lenders are constantly developing new products to meet the needs of borrowers and the fact there are now 250 offset products available in the market illustrates this.

"Going forward, continued innovation by lenders will help to increase consumer awareness of offset products and expand the market potential for offsets in the future."