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Offset mortgages and compensation arrangements

Category: Mortgages
Author: Tim Leonard
Updated: 15/10/2018

With an offset mortgage, are your offset savings protected under the FSCS?

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?

What are the FSCS rules for savings accounts?

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.

What are the FSCS rules for offset savings accounts?

Offset savings accounts are treated a little differently. Again, where your mortgage and savings are in separate arrangements, your savings are covered for the first £85,000 per person, per UK banking licence.

Any savings you hold in an offset account above the £85,000 limit may be used by the insolvency practitioner (the firm appointed to deal with the company's affairs after they become insolvent) to reduce the mortgage debt in a process known as "setting-off". This process is not automatically applied by the Compensation Scheme, but would be undertaken under insolvency law.

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 insolvency practitioner arranging for the remaining £15,000 to come off your mortgage balance. This would leave your mortgage balance at £185,000.

What about a mortgage and savings held in the same account?

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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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.