Offset Mortgages -- the Numbers

BobbyBaggins

I posted a question several months ago, which was duely answered. However, when I received a reply from the FSA it provided a slightly different answer. Be careful with offsets. There is a chance that you could lose anything over £85k (or £170k for 2 parties) that you have offset, in the event of the institution going under. Details are:

Dear BobbyBaggins

Thank you for your email dated XXXXXXXX.

Having read your email, I understand that you wish to know the compensation position for offset mortgages.

I would like to thank you for taking the time to contact us about this matter and I appreciate the concerns you have about this matter, particularly given the unique nature of an offset mortgage.

Firstly, I thought it may be helpful if I explained the role of the Financial Services Authority (FSA). By law, most financial services firms must be authorised and regulated by the FSA to do business in the UK. The firms we regulate include banks, building societies, credit unions, insurance companies, friendly societies, financial advisers, stockbrokers, fund managers, mortgage brokers and insurance intermediaries. You can find more information on our role and remit in our factsheet:

www.fsa.gov.uk/pubs/other/essential_facts.pdf

We are an independent body set up by Government under the Financial Services & Markets Act 2000 (the Act) to regulate financial services and protect the rights of consumers. However, we are only one part of a regulatory framework set out in Act as it also provides two other parts: a free complaint resolution service which is the Financial Ombudsman Service and the Financial Services Compensation Scheme (FSCS), which is a 'safety net' to provide compensation to individual customers when financial firms go out of business.

Turning now to offset mortgages, as you are aware, offset mortgages are designed to reduce the interest on your loan by using the savings you have against the mortgage. In your case, this means that you are effectively paying interest on a mortgage of £100000, and any additional payments are debited from the capital on your loan. This has the overall effect of reducing the term of your mortgage.

Because of this, the treatment of off-set mortgages for compensation purposes is slightly different to normal. Where a firm has failed and the FSCS are dealing with claims, then amounts owed to the failed firm (for example, loans, mortgage or credit card debts) are likely to be taken into account before any compensation is paid. If however, the firm is carrying on business as usual, FSCS would not be handling claims and so compensation limits and set off would not apply.

If you are both a depositor and 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 will consider a depositor's overall net claim. That would include taking into account the amount of any liability 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, and 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, whether or not set off is applied will depend on the circumstances surrounding the failure of the lender, and the contractual terms of the accounts in question. There may be occasions when set off will not be applied, in which case compensation will be based on the total of your deposits per person, per authorised firm, and the loan will still be repayable in full.

I realise that compensation arrangements for offset mortgages are difficult to understand. Therefore, you may wish to contact the FSCS for further clarification. Contact details for the FSCS are:

Write: FSCS, 7th Floor Lloyds Chambers, 1 Portsoken Street, London. E1 8BN
Telephone: 0207 8927300
E-Mail: [EMAIL="enquiries@fscs.org.uk"]enquiries@fscs.org.uk[/EMAIL]
Website: www.fscs.org.uk

For further information about compensation, you can visit our website at:

www.fsa.gov.uk/Pages/consumerinformation/compensation/index.shtml

I hope this is helpful to you and has explained the compensation arrangements for offset mortgages. If you have any future questions on financial services and products, you may find it easier to call our Consumer Helpline on 0845 606 1234 (call rates may vary). You can also access relevant information online at:

www.fsa.gov.uk/pages/consumerinformation/index.shtml

and via the Money Advice Service:

www.moneyadviceservice.org.uk

Yours sincerely

harvey115

As suggested the correct answer can be obtained through FSCS not FSA directly. Although both the departments/divisions are quite close to each other, the schemes they follow sometimes are not fully understood amongst the different divisions.

I would think the FSCS if contacted would certainly give you full details on the compensation scheme setup specifically for Offset Mortgage accounts.

user01234560

hello, folks !
First, one should understand the general math properties of mortgage loans: the monthly payments get smaller once either interest rate is lowered (what happens now when Central Banks lower the rates), or when the duration (maturity) of a loan is increased, or when you reduce the nominal value, i.e. do a prepayment.
You may also consider a scenario to sell your house, pay the remaining loan, then buy a new, cheaper house (this applies when you already paid notable fraction and your house costs enough to exchange it for cheaper but still suitable house).

But once we know the theoretical properties, still each of us have very different situations: bigger or smaller loan size, fraction prepaid, maturity, etc. Thus, one still needs to get mortgage calculation tools, estimate numerically particular scenarios (e.g. increase by 5 or 10 years, etc), and finally, compare and choose the most suitable for you scenario.
You can have detailed scenario analysis using mortgage tools at finadatasolutions.com. We especially aimed to adapt formulas to use in practical cases !:j

user01234560

.... and one important factor which we take into account at finadatasolutions.com, and which frequently is not considered - the rates are FLOATING, thus, they are small NOW, but are you shure how the rates will evolve with time ?? My friend enjoys now his 1200 dollar monthly compared to 1800 which he had in 2007, but what if rates will be 3,5,7% in 2015 ? He will pay 2400 monthly or so Then you need to hedge against possible inflation, and compare, how much you loose by not enjoying floating rates during these few years, and how much you will save in next 10 years with fixed rate

Thrugelmir

user01234560 wrote: »

My friend enjoys now his 1200 dollar monthly

Sterling over here not dollars. :rotfl:

Bianchiblue

Hi all,

my circumstances are - on the mortgage I owe £64K currently pay 2.59% and have 14 years to go. I have savings of £15K and am due to receive inheritence of £35k

I am anxious that i use the £50K well. My inital thought was to make a huge mortgage overpayment, but now i thinking about an offset mortgage instead, as i don't want to blow the 'rainy day' fund. I have no problem meeting my current mortgage comitments. However I don't fully understand offset mortgages.

with the offset mortgage is it a case that in addition to making the monthly repayments, the interest gained on the savings would effectivley be used in a similar way to making a mortgage overpayment?

Based on the figures I have quoted would I fair well an offset mortgage?

Any advise is appreciated, you can probably tell i am a little confussed.

vacheron

If you offset your savings you won't earn interest as the interest you would have earned is sacrificed in order to reduce the amount of interest you pay on your outstanding mortgage capital.

In your example, with 64K outstanding you will be paying approximately £140per month in interest and the remainder is steadily paying off the 64K capital.

If however you used 32K of your inheritance to offset half of your your mortgage owing you will only be paying half the interest each month (saving you approx £70 per month). You can usually then decide if you want the mortgage company to reduce your monthly payments by £70 each month, or alternatively you can choose to keep paying the same amount and the "extra" £70 will be used to overpay the capital.

You would still have instant access to the 32K though, so if you needed you could use this to pay the mortgage until it is used up should the situation you describe occur.

Hope this helps.

salmakent25

Offset makes sense when interest rates are high but less so when rates are so low.

getmore4less

salmakent25 wrote: »

Offset makes sense when interest rates are high but less so when rates are so low.

WHY?

what changes?

harvey115

salmakent25 wrote: »

Offset makes sense when interest rates are high but less so when rates are so low.

you seemd to be confused.....com?