HSBC - Mortgage Offset Savings - How Safe?

ReggyPerrin

Hello All

I thought I had a reasonably prudent (if conservative and unexciting) savings strategy with First Direct / HSBC, given their previously pretty good liquidity and capitalisation. But with Friday's share issue news, and yesterday's knee-jerk of the markets, I just don't know what to do for the best.

Here's my dilemma, which I'd be very grateful for some opinions on.

I have a fixed (till spring 2010), reasonable rate, off-set six figure mortgage with First Direct.

I have a six figure sum of cash (our life savings) in several First Direct savings and current accounts, which are all linked to off-set against the mortgage, effectively netting me the equivalent of 4.75% AFTER tax.

The cash on deposit is several times the FSCS compensation limit however.

This amount was previously (till 2007) in a mix of equities and other investments. Then I liqudated the lot at the end of of '07 as the storm clouds were gathering, and split it across multiple fixed and variable savings accounts (all under the (at the time £35k) FSA compensation limit, and with different parent group banks).

Then as all the banks started to go bust and interest rates tanked, I aggregated the lot and moved it all (bar ISA portfolios) into FD, to off-set against the mortage, as a) this was by far the best net interest rate on offer then and b) as wholly owed by parent HSBC, I thought it might be a safe port in a storm.

Now the latest mass media scare-mongering about a 60% drop in HSBC share price (in 18 months, not 18 hrs), as if the bank were bust, rather than having made a $10bn profit despite 2008! - But, that doesn't mean there still couldn't be mass herd public and institutional investor loss of confidence in even this stalwart.

My concern is thus threefold:-

1) Could First Direct / HSBC realistically get into such trouble (if there is public panic and a run on the bank), that they go under, and I lose everything except the £50k covered by the FSCS.

2) Worse still, I understand there is a "right of set-off" concept, where in such a circumstance HSBC / FD could deduct the balance of our outstanding mortgage from our savings. As the mortgage is the larger, it would effectively completely wipe out all our savings and still leave us with a debt.

3) The instant access, no penalty, cash on deposit rates on the market now are just dire, and in effect with inflation, the money would be earning nothing, were I to split it up and move elsewhere. And we rely on the current five figure net return to live. Even the "best" fixed two year deals, such as Abbey's 4.0% bond would be a net 40% drop in return by comparison.

I don't wish to do the "obvious thing" of clearing a large chunk of the mortgage debt just yet, as both my wife and I are self employed, our pensions worthless, and we have no way of knowing if our own business income will continue, and to what extent, this year or next, and thus it's essential to maintain liquidity, as once that cash lump is gone (even with lower overheads due to no mortgage), the chances of getting a re-mortgage or loan if needed to keep paying other overheads are very slight in this economy. Whereas as it stands, in a total emergency it would keep us going for a few years if all business income dried up completely.

To add further headache, both our business bank accounts, which carry working cash are also with HSBC (again, originally chosen for the bank former robustness).

So I have the hobson's choice between a) best guarenteed return for at least another year, coupled with highest possible liquidity, (and without penalty or notice), by keeping all cash with FD, but with massive (?) potential risk of losing the lions share of it in worst case scenario.

Or, b) play it uber safe and move / split up the nest egg, but take a 50%+ hit on essential interest income in a year when every £1 counts.

I'm just not sure which way to play it.

How safe is HSBC / FD? - Given our income and personal circumstances above? -

Would anyone say I was taking too greater risk staying put (or leaving 100% of what we have invested there currently), and hoping to ride this one out?

Really appreciate any views.

Cheers

Reggy

dizzie

Hi,

I don't have the expertise of working in the finance sector (having said that, it seems that some of those who have been employed in this sector could hardly be described as "experts" either, judging by the mess we're all in).

I've two thoughts on your email:

1. Reggy, you refer to "our life savings". Does that mean that the mortage/savings are jointly held between two of you ? i.e. in that case the FSCS would provide compensation of £50k each, giving you peace of mind up to £100k.

2. Re risk. If I were in your shoes, my rationale would be as follows:

In the worst case scenario, let's say they go bust. They effectively subtract the savings from the mortgage debt. What you have actually lost is flexibility i.e. you haven't actually made a net loss, but of course although you are left with a much smaller mortgage, you haven't got the offset savings to dip in and out of as you used to have.

In that case, maybe you ought to consider how much of your offset savings you would be likely to need for other purposes (i.e. you are self employed and so may use this as a temporary storage vehicle in which to keep the money you pay the taxman?). If you are worried, maybe you could take out a proportion of this money and save it elsewhere (and just accept a lower net rate of interest on this amount as a price you need to pay for the flexibility it would offer you in the event of your current bank failing)

Although the banking sector is in a heck of a mess right now, HSBC do look much stronger than many more out there. To date (correct me if I'm wrong), I think only ICESAVE has gone belly up, so for the time being, whilst much weaker players than HSBC can still hang on in there, I would not be unduly worried.

RE Business banking. I'm also in small business partnership. We ditched HSBC several years ago and went with A&L Commercial Bank (at the time because I was fed up with HSBC's extortionate charges and A&L give us free business banking which saves us around £400 per year). If you don't have to rely on staying with HSBC for your business banking, maybe a move would also help to spread the risk about.

Reaper

ReggyPerrin wrote: »

2) Worse still, I understand there is a "right of set-off" concept, where in such a circumstance HSBC / FD could deduct the balance of our outstanding mortgage from our savings. As the mortgage is the larger, it would effectively completely wipe out all our savings and still leave us with a debt.

Just to cofirm what Dizzie says... they deduct your savings from the mortgage and if that leaves a postive balance they then cover you for up to £50,000.

On the bright side...
1) You wouldn't be any worse off if that happened, though you would lack short term funds (maybe move a little to another bank if it makes you feel better)
2) HSBC are one of the least likely banks to go under.
3) Even if they do it is more likely the mortgage would be sold on to another bank, after all that has to happen for the non-offset mortgages.

If it were me I wouldn't worry, but you could switch a few months wages to a savings account elsewhere if it makes you feel more secure.

ReggyPerrin

Thanks very much for your thoughts Dizzie & Reaper. Sage words.

I think the optimum thing to do as you say, is move a small amount to another "safe as can find" savings account, (Northern Rock, NS&I ?), and just sit tight with HSBC - esp given todays drop in base rate, which all the banks and building societies will of course immediately "pass-on" in savings rate slashes (unlike variable mortgage rates, which most will "collar" at 4-5% above base!).

Cheers

Reggy