Offset mortgage dilemna.

Locoblade

See Question 5 on the FSCS FAQ

http://www.fscs.org.uk/consumer/FAQs/Deposit_claims_FAQs/

5. What happens if I owe money to a bank, building society or credit union that fails?

Amounts owed to the failed firm (for example, loans, mortgage or credit card debts) are taken into account before any compensation is paid.
If you are a borrower with the same firm this may affect the amount you can claim, as the amount of your deposits may be 'set-off' against any amounts you owe.
If a firm were to fail, FSCS would consider a depositor's overall net claim, which would include taking into account any amount owed which the firm may set off.
In the event that set off is applied, and if the borrowings exceeded the depositor's savings, there would be no overall claim against the failed firm, and the depositor would not be entitled to any compensation.
For example, if a depositor had a mortgage of £200,000 and savings of £150,000 with the same bank, set off may be applied by the Insolvency Practitioner dealing with the bank failure. As a result, the depositor may end up owing the bank £50,000, so there would be no positive balance and no claim for compensation.

However, this article on Motley Fool suggests some Building Societies may be treated differently and therefore may be at risk with any offset over £50k (or £100k for a joint mortgage)

http://www.fool.co.uk/news/property-home/mortgages/2008/04/11/be-careful-with-offset-mortgages.aspx

silvercar

simch wrote: »

Hi, long time reader, first time poster here.

Slightly off topic but connected maybe to this. My neighbour has an offset mortgage, since he had an inheritance 2 years ago. I wont say who its with, but its a mainstream one.
Anyway, he asked me to read through the smallprint a bit, in light of the economic climate just now.

He has £202k mortgage, offset by £122k savings maenain he currently pays interest on the £80k net liability.
But, it transpires if his lender goes pop, he will have £50k of his £122k covered only, and will lose £77k, and yet still be liable for the whole £202k loan.
So basically, although they offset in the normal cause of business, they wont if it all goes bad!

Sorry of it seems obvious to all you that have them, but he was surprised and it showed his a potential risk he had never dreamed of before.

Of course he can pay the capital sum down and end up with a net £80k and no savings, but as his whole idea with this was to offset and keep his options open, he woudl then lose those options.

So he is consdideing his options, trying to limit his liabilities and maximise his liquidity. I suggested offset just £50k for now and move the balance of capital to another lender in the short term..?

I'm in the same situation. I think the answer is to either rely on the governments recent promise that savers won't lose their money or to reduce the mortgage so that no more than 50k is in the offset savings pot.

Totally agree that it defeats the purpose of choosing an offset mortgage in the first place.

silvercar

A lot of generalising on this thread.

Some lenders operate an offset as one account with a negative balance (eg first direct). Others have a separate savings account (some building societies).

Some gather up the overpayments and use them to reduce the balance once a year; some reduce the balance instantly.

Some require no monthly payment if the outstanding balance is offset; some require a set payment and use it to reduce the balance.

Some apply a right of offset in the event of liquidation, some don't.

AFAIK, no-one pays interest on balances above the mortgage level.