When you're a first-timer or an existing mortgage holder, the thing you should wish for most in the mortgage market is innovation as competitive change tends to translate into lower prices and more choice for consumers.
Almost a month into 2005, the signs are pointing in the right direction in this regard, with National Irish Bank (NIB) taking on the role of leader. The bank, in the process of being taken over by Danish institution, Danske, said last week that it was launching a new "Offset Mortgage Account". This new structure, which bears many similarities to First Active's current account mortgage, promises to save homeowners "billions" in interest repayments and to "slash years" off their mortgage terms.
Sounds appealing? Whether the claim is justified will depend on who holds the mortgage. As with all structures, this offset loan will work well for some but will do no favours for others.
The basic premise with the offset structure is that it allows borrowers to use money they have in current or savings accounts to reduce the amount of interest they must pay on their mortgage. This is because NIB effectively reduces the outstanding amount owed on the mortgage by the amount the customer has in these other, linked accounts. If a borrower has a mortgage of €200,000, a balance of €10,000 in a savings account and €2,000 in their current account, they only pay interest on €188,000 of the mortgage. And the longer the money is in these accounts, the greater the benefit.
By NIB's calculations, a homeowner with a €100,000 mortgage that has 20 years to run and bank balances of €20,000, would save €14,271 in interest and cut the term to just under 18 years. The loan will not make sense for customers who have no savings or make frequent use of overdrafts.
Mortgage adviser, Ms Sarah Wellband of Rea, says borrowers considering the switch to this type of loan should work out how content they would be to leave cash in their current or savings accounts for long periods.
"Are they financially disciplined? Are there other debts which should be cleared before savings are deposited? Should they be investing in other areas such as improving their home rather than offsetting against the mortgage?" she asks.
Ms Wellband has been advising on First Active's current account loan since its launch, and says she always hesitates before recommending it to first-timers, or those who don't count budgeting among their talents.
The offset loan bears a likeness to First Active's current account mortgage, which has been in existence for about two years. First Active says the average age of its applicants is 38, an age which suggests a degree of maturity. Some 42 per cent of borrowers are furthermore looking to refinance, with just one-fifth falling into the first-timer category.
There are a few small technical differences between the First Active and NIB structures, such as NIB's offer to allow more accounts to be used to offset the homeloan and its offer of more account facilities such as online banking. More crucially, NIB also has more competitive interest rates than First Active, thus making its mortgages a touch cheaper. As with all areas of banking, customers will always be advised not to accept the first deal their institution offers without at least attempting to bargain them down with reference to the competition.
