As interest rates on savings accounts and mortgages remain at prolonged lows, many have elected to put the two together in the form of an offset mortgage. With an offset mortgage you forgo earning interest on your savings in order to pay less interest on your debt. And less interest means that you can repay your mortgage quicker, and still have your savings nest egg at the end when the mortgage is gone. But what are the compensation arrangements for having your savings offset against a mortgage?
Normally, under the terms of the Financial Services Compensation Scheme (FSCS), your savings are protected up to £85,000 per person, per UK banking licence. Because the limit is individual, if you and your partner held a joint savings account with a particular bank (and providing you have no other savings with that bank), that account would be covered up to £170,000.
However, this cover is only per banking licence – so if you hold a couple of accounts with different brands of the same bank or building society, you would only be covered up to £85,000 across all the brands, not £85,000 for each brand you bank with.
It's sometimes the case that bigger banking groups have more than one licence. For instance, Lloyds Banking Group has two licences – one for former Lloyds TSB companies, and another for former HBOS companies. So if you have an account with £85,000 in it with Halifax and an account with £85,000 in it with Lloyds, all your money would be covered.
You can find out which brands are owned by whom, and under what banking licences, by clicking here.
Remember, the Financial Services Compensation Scheme only protects the first £85,000 of savings held under one UK banking licence. Amounts above this are not covered and, in the event that your bank or building society collapses, would be lost.
Offset savings accounts are treated a little differently. Again, you are covered for the first £85,000 per person, per UK banking licence.
However, amounts over £85,000 that are held in an offset savings account are not lost, as they may be in a normal savings account. Instead, the remainder goes towards paying down your mortgage balance – what is called "setting off".
For example: you have a mortgage balance of £200,000 and have £100,000 in a linked savings account. If your bank then went bust, you would receive £85,000 back from the Financial Services Compensation Scheme, with the remaining £15,000 coming off your mortgage balance. This would leave your mortgage balance at £185,000.
There's one exception to this: when your mortgage and savings are held in one account, and your mortgage effectively works like a massive overdraft.
In this situation, any savings you have placed in this account wouldn't be compensated, although they would be set off against the mortgage balance.
For example: you have a mortgage of £100,000 and have put £1,000 of savings into your account. If your bank goes bust, you wouldn't receive any compensation from the Financial Services Compensation Scheme. However, your mortgage balance will be £99,000, as the £1,000 has been used to repay some of the balance.
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