Homeowners could avoid end of free banking

Offset and current account mortgages could offer an escape route for customers faced by current account charges, the leading financial services research company Defaqto believes.

It has warned free banking could be over in two years but points out that offset and current account mortgages could be a way round the imposition of charges on accounts. Defaqto believes the ending of free banking could be a boost for the mortgages which combine a home loan with a bank account and potentially a range of other financial services products.

In its report “Offset and Current Account Mortgages – The way forward”, Defaqto reveals that providers who do not impose charges will potentially be able to save customers around £120 per year. There are currently 36 providers involved in the offset and current account mortgage market offering a total of 198 products among them. Three providers offer both offset and current account mortgages (Clydesdale, NatWest and Yorkshire Bank).

Defaqto warns these types of mortgages can take some time to comprehend and British customers have traditionally been more comfortable with standalone financial products. However, it believes that customers will be more willing to combine products such as current accounts, overdrafts and savings into one account as charges increase.

Up to now favoured by people with higher incomes, Defaqto states that providers of current account and offset mortgages will be looking to target a wider range of customers as the existing market becomes saturated. Two groups of potential winners include buy-to-let investors who use offset mortgages to hold savings balances to cover ongoing bills for maintenance, repairs and tax liabilities and City workers with big bonuses who require greater flexibility.

David Black, Head of Banking at Defaqto and author of the report said: “With the likely ending of free full service current accounts, customers will potentially be able to save around £120 or so a year by having a current account or offset mortgage. They are now increasingly regarded as mainstream products and we believe that providers will start to target new markets such as buy-to-let investors or those with lumpy income streams.”

Defaqto has highlighted the consumer benefits of current account mortgages and offset mortgages. These include:

Ability to make overpayments
Ability to take payment holidays or underpay
Credit balances will generally earn interest at the same underlying rate as the mortgage
Tax efficiency – particularly for higher rate tax payers
Easy access to savings balances
These are longer term vehicles so potentially remove the cost and hassle of remortgaging