Offset mortgages: How safe is your money?

Article source: Diana Wright -

Offset mortgages - How safe is your money?

Consumers with debts, savings or one of the very popular offset mortgages at the same bank or building society face increasing confusion over the level of protection they are entitled to under the Financial Services Compensation Scheme (FSCS).

When you take into account debts like mortgages and loans, the fact is that 100% of savers’ money is protected is not actually entirely truthful. Whether your savings and deposits are entirely protected depends on whether you are indebted to the same firm with which you hold your savings. This is regardless of whether the firm is a bank or a building society but, in some cases does depend on the sort of debt involved.

The Financial Services Compensation Scheme limit, which is about to increase from £35,000 to £50,000, applies only to savings and deposits where the relevant financial institution hold a separate registration with the Financial Services Authority (FSA); for example a banking group, like the Spanish giant Santander, will only hold a separate registration under their subsidiary, the Abbey in the UK; this means that only the combined savings and deposits of a customer held under the Abbey and its sister Bank, the Bradford and Bingley, will be guaranteed to the maximum combined value of £50,000.

Where banks are concerned, whatever the nature of the debts are, the total combined debt an individual holds will be set off against the savings before deciding if they are eligible for compensation under the scheme, and if so what level they are entitled to.

The following is example of how this would work in practical terms. If you had a £5,000 overdraft and savings of £35,000 with a bank that had collapsed, the £5,000 overdraft that you had with the bank will be cleared and you would now have £30,000 in savings. This is the amount that you would be covered for under the Financial Services Compensation Scheme. Using this example it is clear to say those customers with bigger debts will more adversely affected.

Building societies have different and varied terms and conditions. A good example is the Nationwide; its rules do not allow savings to be used to clear other debts unless the borrower is in default on that debt. The only exception is in the case of an overdraft, the rules in this case mean the overdraft would be cleared even if the individual is not in default.

If the Nationwide was to go under, any administrator brought in would have to follow the rules of the Society. It therefore follows that an individual with large savings, deposits and a mortgage with the society would stand out to loose more overall, than someone in a similar situation with a bank; this is because the outstanding debt can not be offset against their savings.

In most of these cases according to the Compensation Scheme whether the offset mortgage is in the possession of bank or a building society, the same rules apply. As long as your savings are less than your mortgage, you are 100% protected up to your savings limit. Any one else who has savings and debts with one single bank will be in the same position. They will have their debt set off against their savings. Only the net loss of an individual, after any debts, can be considered for compensation under the scheme.

On the other hand, for those who are with a building society, this rule may vary and depends largely on the individual terms and conditions of the Building Societies in question; it can also depend on which savings, mortgage and other debts you have with them.