Save more than £16,000 over the lifetime of a mortgage by switching to a Virgin One current account mortgage, says Virgin's publicity campaign. But you can save as much as £38,000 by opting instead for one of Virgin's flexible mortgage competitors, shows analysis from one mortgage broker.
Home-owners can pay tens of thousands of pounds extra in interest if they choose the wrong flexible mortgage. The Virgin One current account mortgage could cost £38,000 more over the 25-year life of a £200,000 loan, compared with an Abbey National flexible mortgage, calculates mortgage broker Select Mortgages and Loans. Select says Virgin One looks more than £29,000 more expensive than the Woolwich Open Plan offset mortgage, which has just been made available to Barclays' customers.
"All of these mortgages allow you to underpay, overpay and take payment holidays," says Select partner Steve Herbert. "The Woolwich Offset and Virgin offer cheque accounts where you can offset the capital in your account against your mortgage. Virgin requires your salary to be paid into your account. Woolwich doesn't."
Virgin's lowest standard variable rate is 5.7 per cent, significantly higher than the 5 per cent of an Abbey National flexible mortgage or the 5.25 per cent offered by Woolwich on its offset account. But Virgin's rate rises to 6.45 per cent for customers who borrow a high proportion of their home's value. Virgin's rate changes according to loan-to-value, or LTV. The higher the proportion, the higher the interest rate.
Abbey National's rate is maintained at half of 1 per cent over base and Woolwich tracks the base rate, plus 0.75 per cent. In an environment of falling interest rates, borrowers are better off with a tracker mortgage because lenders using standard variable rates may not always quickly pass on lending rate cuts. Virgin immediately passed on the last two Bank of England base rate cuts, but Intelligent Finance on its offset account delayed implementation for weeks. IF is not passing on in full the last quarter per cent cut, reducing its SVR by only 0.15 per cent, to 5.35 per cent (from 13 November).
All of these flexible mortgages, though, can be beaten in simple rate terms by the best fixed rate mortgages available, such as that sold by Nationwide at 4.45 per cent. There are strong benefits to using a flexible or offset mortgage, in wise hands. "They are a phenomenal product for the right person," says Mr Herbert. Last month he counselled a client who maintained a current account balance of between £15,000 and £25,000. He stands to save thousands of pounds over the course of his mortgage by switching to a flexible mortgage.
"For them a flexible mortgage is ideal," says Mr Herbert. "Or for someone who wants to overpay, or someone who wants to use it as an overdraft facility at an incredibly low rate." At present rates, an overdraft through a Woolwich offset account will cost just 5.25 per cent compared with 16.49 per cent for an authorised overdraft with NatWest. But for many people the flexible mortgage is a temptation too far. Mr Herbert says 60 per cent of his remortgage clients are wiping off credit and store card debts by taking equity out of their properties. People with weak control of their finances should avoid a flexible mortgage.
This type of customer represents large profits for mortgage lenders. "They have a big mortgage at the outset and the chances are that at retirement they will still have a big mortgage," says Mr Herbert. Another benefit to the lender of a flexible or offset mortgage is that it becomes inconvenient to switch to cheaper mortgage deals because the mortgage is tied to the current account, helping banks keep customers. And clients are paying more than they would with a good fixed rate or discounted deal. "If someone is going for a flexi-mortgage then they have to look at the bottom line over the long term," says Mr Herbert.
Virgin One spokesman James Duffell rejects the criticisms. "The answer is that if you buy on rate then our product is not competitive," he says. "But you should not buy only on rate, because the product is not just a short-term fixed product which you are going to move from after two years. It is about more than just a short-term discount rate."
Mr Duffell says comparing Virgin One's current account mortgage with competitors' offset and flexible accounts is equally wrong. "Some of these so-called flexible mortgages are as flexible as a crowbar," he says. Managing an offset account is more difficult than using Virgin One, he adds. It is necessary to anticipate what payments will be made and to ensure there are sufficient funds to make a transaction. But failing to make arrangements for an overdraft on an offset account can cost high interest and penalty charges.
Virgin One is critical of the offset products offered by IF. With IF, each of the elements – current account, savings account, credit card, personal loan and mortgage – operates with its own interest rates. Credit card debts are charged at 9.9 per cent and personal loans at 9.6 per cent. Balances in a current or savings account are offset against the customer's most expensive loan. Under the Woolwich offset arrangements, personal loans and overdrafts attract interest at the mortgage rate.
But the criticism of the Virgin One product is endorsed by mortgage broker London & Country. Mortgage specialist David Hollingworth says: "You can achieve better rates than Virgin's on the offset products. In terms of functionality, obviously Virgin One has all the bells and whistles. My experience is that people prefer the offset accounts, because they can keep the pots separate."
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