No-catch deal takes home-loan prize

Winning this category is quite an achievement for a veritable minnow in the mortgage sector, which has just 55,000 borrowers among a total customer base of 1.2 million, and essentially a one-product mortgage offering.

Almost five years ago, First Direct - the UK's most recommended bank for the past 13 years according to independent surveys from Research International and Mori - chose to focus on promoting the relatively new kid on the mortgage block: flexible home loans with the added option for customers to offset loans against their savings balances.

The bank says it achieves its goal of top-class service for borrowers by offering good interest rates (its standard variable rate is 5.5 per cent APR, the same as parent HSBC's, but it also offers a short-term discount to 4.5 per cent APR and a three-year fixed-rate of 4.89 per cent APR), 24-hour access to their mortgage details and total flexibility by allowing unlimited overpayments, payment holidays and no early redemption penalties.

Chief executive Richard Kimber says borrowers are steadily beginning to grasp the tax benefits of flexible loans. 'People pay tax on the interest they earn from conventional savings accounts. If they can offset their savings balances against a mortgage they don't pay the tax and so effectively get a higher net rate of interest.'

First Direct's flexible offset is not the cheapest around, but has attracted a high level of remortgaging business - eight out of 10 borrowers have switched from other lenders, Kimber says.

He puts this success down to a combination of a low arrangement fee, high customer service and the ease of opening a mortgage account. Kimber says: 'There are also no penalties or exit fees, unlike with other lenders.'

David Hollingworth, of Bath-based mortgage broker London & Country, agrees that First Direct's mortgage business has always stood out in terms of service. He says: 'People find First Direct easy to deal with. There is always a helpful human being at the end of the phone. If I were to pick holes, it would be its focus on flexible offset. However, it's a no-catches flexible deal and there are fixed rates as well as discounted variable deals. People can do better on the rate but it offers no hidden nasties and the service is very good.'

First Direct certainly has the technology to keep its customers in touch with their mortgage at any time of day or night. The bank claims to send one text message every second to those who have signed up for a special text service, while a customer phones First Direct every 2.5 seconds and emails it every 30 seconds.

Kimber, an Australian, points to wider acceptance of flexible- and offset-style deals in his native country, and in the US, as one reason to be optimistic that the idea will flourish here. He says: 'Offsetting will take off in the UK, especially once people understand the concept more. People don't just need to have savings to benefit. 'Any turnover in their current account can be used to offset the loan and help reduce the term.'

Kimber says the bank also plans to expand its range of mortgages: 'We want to be a great mortgage provider, not just a great current account provider.'

Despite its gold-top reputation in general banking, First Direct has managed to ruffle a few customer feathers in the past year. In the spring, it increased overdraft rates for both authorised and unauthorised dips into the red and savagely chopped interest rates for smaller savers in its standard savings account, so that those with less than £500 now receive only 0.10 per cent gross. But it did raise the interest rate on its internet-only e-Savings account, which now stands at 4.89 per cent gross for balances from £1.