Offset Mortgage Risk

dipdab

Hello forum!

I am applying for an offset mortgage with Coventry Building Soc (CBS) to buy a house with a 25% deposit. The reason I want an offset is that I run my own business as a sole trader and generate good free cash flow which I want to put to good use.

My concern is that with an offset mortgage, my offsetting cash will be held in a CBS savings account. Clearly, there is a risk that should CBS go bust, I only get a max of £35k of my cash back from the Financial Services Compensation Scheme. I therefore have a couple of questions:

1) Surely building societies like CBS (which funds ~70% of its mortgage book with deposits) are at a fairly high risk of collapse as they will tend to have greater exposure to the housing market? They are therefore exposed to risk that their mortgage book goes bad as repossessions rise and as a result suffer a run from their depositors. Is this logic sound? Are building societies in any way safer than banks?

2) What is the likelihood that our dear government would bail out a small building soc like CBS should things turn bad?

3) Is there a way to insure against the risk of losing my offsetting cash should the CBS go bust?

I'd welcome any tips or ideas.

Dan

maninthestreet

This has been raised before - if you have an offset mortage of £100K, with £40K in a savings account, and the lender went bust, the money in the savings account would be subtracted from your mortage, meaning you would owe only £60K instead of £100K.

EdInvestor

dipdab wrote: »

1) Surely building societies like CBS (which funds ~70% of its mortgage book with deposits) are at a fairly high risk of collapse as they will tend to have greater exposure to the housing market? They are therefore exposed to risk that their mortgage book goes bad as repossessions rise and as a result suffer a run from their depositors. Is this logic sound?

All lenders are exposed to the risks you mention.So far none has gone bad or suffered a run (the run on Northern Rock was not caused by exposure to the UK housing market) and was the first in the UK for 90 years IIRC..

Are building societies in any way safer than banks?

Not IMHO: arguably less so as they have no shareholders to get new capital from.However as a group the building societies tend to help each other out, so if one gets into trouble, it tends to get taken over and depositors don't lose (indeed they may get a windfall).

2) What is the likelihood that our dear government would bail out a small building soc like CBS should things turn bad?

See above.A merger or takeover by another BS is more likely.

3) Is there a way to insure against the risk of losing my offsetting cash should the CBS go bust?

Not AFAIK: it's an inherent problem with the offset idea at present.

badm88n

EdInvestor wrote: »

Not AFAIK: it's an inherent problem with the offset idea at present.

Not a problem at all as the offset savings would be subtracted from your mortgage debt. If your savings were NOT in an offset arrangement then you would lose everything but the first 35K.

So with a mortage of £160K, and offset of £80K you would be guaranteed 35K and the remaining 45K would be subtracted from you mortgage leaving a mortgage of 115K. Without an offset arrangement you would be guaranteed 35K and lose the remaining 45K, and still have a mortgage of 160K.

The negative point is you have no liquidity left, all your savings have been used to reduce the overall mortgage debt.

One way of doubling your protection would be to have a joint savings account, therefore guaranteed 35K x 2. With an offset this may mean having a joint mortgage, not sure about this you will have to ask the lender.

surreysaver

badm88n wrote: »

Not a problem at all as the offset savings would be subtracted from your mortgage debt.

But the fact the savings would be subtracted from the debt would cause the OP a problem, as it is the OP's cash flow that would be used to offset. The OP would not be able to draw the savings back out again, and so the business could potentially go bust.

EdInvestor

badm88n wrote: »

The negative point is you have no liquidity left, all your savings have been used to reduce the overall mortgage debt.

.

Since this is the main point of having an offset in the first place (otherwise you'd just reduce the loan amount) for most people it will be seen as a major risk not just a "negative point".

silvercar

2) What is the likelihood that our dear government would bail out a small building soc like CBS should things turn bad?

CBS is the 4th biggest building society in the country, so not that small, in the scheme of things.

I had a similar worry, particularly as the coventry operates the offset as a separate savings account, so I'm not 100% sure that funds above the 35k limit would be protected. In the end I decided that there are too many things in life to worry about.

minimike2

Companies like Coventry, Skipton, Chelsea are well buffered up with cash at the moment. Since the NR saga, they have to report DAILY to the FSA on thier activities, including thier lending ratios. Building societies have much stricter criterias on debt to lending ratios than banks do. There is a LOT going on behind the scenes to prevent any of these Building Societies going bust.

EdInvestor

minimike2 wrote: »

Since the NR saga, they have to report DAILY to the FSA on thier activities, including thier lending ratios. Building societies have much stricter criterias on debt to lending ratios than banks do. There is a LOT going on behind the scenes to prevent any of these Building Societies going bust.

Not a very encouraging post, is it?

minimike2

EdInvestor wrote: »

Not a very encouraging post, is it?

What do you mean?

col12345

"a fairly high risk of collapse". You cannot truly think this. they are a top 5 mutual building society. a mutual has not become insolvent for over 100 years.