Offset mortgages and the "Financial Compensation Scheme"

[Dranz100]

So If you've got some cash in the bank, and the bank goes pop, you get most of it back, up to £50K or £70K, I can't remember. So you spread it around other banks if you get near this limit, you keep an eye on which banks own which, and how the limits might overlap, etc. All good.

But what about Offset Accounts on an Offset Mortgage?
I'm asking the question here because I think some of my fellow LBYM Offsetters will have wondered the same thing.
I know I could just ask my bank, but I have little faith that I'll get through to somebody who knows what they're talking about.

I'm hoping that if say you have a mortgage of £300K, and £200K 'savings' in the offset account, as they're with the same legal entity, if the bank goes pop, the receiver / administrator / asset buyer will say
1) At the end of the say, you owe them £100K, NOT..
2) you owe us £300K minus £50K we've recovered for you from the FCS scheme.

Any thoughts or knowledge fellow Offsetters?
Dz

[Spet0789]

If your bank defaults, your savings are fully protected up to the FSCS limit (currently £75k but will increased at the next review). That amount will be repaid to you shortly after default. Any savings above that limit will be used to reduce your mortgage, which will be an asset held by the defaulted bank.

So in summary, your net worth is fully protected but if you have large balances offsetting your mortgage you may lose access to them.

[Spet0789]

So in your specific example with 300k mortgage offset by 200k savings, you'd be paid back 75k in cash and owe the bank's estate 175k.

[Dranz100]

Spet789
Thanks for taking the time to reply on this.
But if you don't mind me asking, what's the basis of your opinion on this?
Do you have professional knowledge of the industry, or are you an offsetter who has had it confirmed from a reliable source?
Apologies for asking. I don't mean to sound rude. But it would be helpful to have something more that 'it's option 2'.
Thanks,
Dz

[Dranz100]

I've thought a bit more about this, and the FCS is almost a red herring. Sure, you'll get £75K if you're out of pocket, from the FSA (or son of FSA).

But If you owe a bank £300K and it holds £200K of you money, and it goes bust, what happens... (ignore the FCS!)
Will the receivers of the bank's legal entity say "you've signed t&c's which say you owe this LE £300K, and other t&Cs for your cash account which say you can whistle for the £200K"....(ignore the FCS £75K!)

or will they say: "Fair enough, it get's netted off, you we us £100K net '

Anyone know? E.g. has an offset mortgage with Northern Rock in 2008?
Dz

[Spet0789]

Netting is quite a complex legal issue and depends on the precise details of the contract but is generally permissible under English law.

But this specific example involving offset mortgages was covered by amendments to the FSCS post Northern Rock - at that point to situation was unclear so it was clarified.

I work in financial services and have quite a chunky offset mortgage so (a) I generally know what I am talking about (!!) and (b) I have done my own research on this but 20 minutes on google will, I'm sure, turn up the source terms of the FSCS.

For ultimate confidence I'd suggest you ask your offset mortgage provider.

[Alaric]

So in summary, your net worth is fully protected but if you have large balances offsetting your mortgage you may lose access to them.

So how does that work? You have a £ 300,000 notional mortgage and you've repaid £ 100,000 of it. Are you able to re-express it as a £ 275,000 mortgage of which you've repaid £ 75,000?

[Spet0789]

So in summary, your net worth is fully protected but if you have large balances offsetting your mortgage you may lose access to them.

So how does that work? You have a £ 300,000 notional mortgage and you've repaid £ 100,000 of it. Are you able to re-express it as a £ 275,000 mortgage of which you've repaid £ 75,000?

In offset mortgage terms, what you mean is that you have a 300k balance offset by 100k of savings. Your net balance is minus 200k.

If your bank defaults, the FSCS will pay you 75k and you would owe 275k (300k-25k). Your net balance remains at minus 200k, hence my comment that the risk is to your liquidity not to your worth.

[AF62]

The answer is in this FSCS PDF document in section 12.50 - https://www.fscs.org.uk/globalassets/pu ... to-scv.pdf

12.50 How do deposit takers treat offset mortgages where there is a negative balance?

Offsetting is dis-applied for FSCS payout purposes so that if a depositor also owes a bank money, the debt is no longer set off against the deposit in calculating the amount of the protected deposit. This has implications for offset mortgages.

If the deposit account is separately identified from the mortgage balance, it should be separated and compensation calculated on a gross basis. However, if the deposit account is combined with the mortgage account, FSCS would have to treat it as an overdraft and no compensation would be payable.

The two most common types of offset mortgage structures have been identified as:

• Type 1: a savings/current account which is usually separately identified from the mortgage balance. The balance in the account is offset against the mortgage and interest is calculated on the amount of the mortgage debt less the amount on deposit;
• Type 2: a current account is combined with a mortgage account and operated as one large overdraft (with a credit limit).

In the first type, deposits are normally separately identified from the mortgage balance, therefore the PRA considers that it should be relatively easy to separate the two elements and calculate compensation on a gross basis.

In the case of the second type, the PRA consider that the nature of the product meant it might not be possible to separate the deposit element from the mortgage element; FSCS would simply have to treat the single balance as a debt to the bank (i.e. as an overdraft).

There is also some comments from the FSCS in this article - https://www.moneysupermarket.com/money- ... -mortgage/

[Dranz100]

Spet 0789 and AF62 and others,
Thanks for your time on this. Proper informed answers, greatly appreciated.
Dranz100