Wealthy Britons are turning to a little-used corner of the mortgage market to cut their bills after a jump in the cost of borrowing.
(Bloomberg) — Wealthy Britons are turning to a little-used corner of the mortgage market to cut their bills after a jump in the cost of borrowing.
About 4% of homeowners taking out a new loan with private bank Coutts & Co. chose an offset mortgage in January, according to the firm.
That’s up from just 0.25% in September, when a botched government spending announcement upended the markets used to price home loans. Meanwhile the Bank of England hiked interest rates in a bid to curtail inflation, putting further pressure on mortgage costs.
“A lot of this behavior has been driven by the increase in interest rates, and clients not wanting to be committed to a fixed rate,” said Annie Ingram, a private banker at Coutts, which is owned by NatWest Group Plc. An offset mortgage “provides clients the option to offset their deposits against their mortgage balance and the benefit of tracking any base rate changes in the future,” she added.
A flurry of these mortgages launched in the 2000s as banks vied to keep customers. For households with a large savings pot, it can make sense to “offset” that money against their mortgage balance instead of earning interest, which is taxable and generally paid at a lower rate than the interest on the loan. They can use the gains to lower the cost each month or to over-pay the mortgage, with these extra payments available to withdraw later if needed.
Floating rate mortgages of all kinds have grown in popularity across Britain in recent months, as borrowers tie their repayment costs to the BOE’s key lending rate in a bet that it will soon go into reverse. The share of people seeking a variable rate loan has more than doubled since an era of cheap fixed-rate deals ended last year, according to mortgage comparison platform Koodoo.
This trend is reflected in Coutts’s data, which shows almost two thirds of mortgage holders were taking two-year tracker deals last month, compared with 11.5% in September. The share of borrowers choosing two-year fixed loans dropped to less than 4% from 16.4% in the same period.
“The split is now more towards 95% in favor of trackers, compared to 50/50 previously,” Coutts’s Ingram added.
At the same time, more offset mortgages are hitting the market. The number of offset deals available in the UK rose 38% month-on-month to 76 at the start of February, according to Moneyfacts Group Plc.
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