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" Are Offset Mortgages A Risk If Banks Go Bust? "

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If the bank goes bust there is no FSA protection for the "savings" in an offset mortgage.

e.g you have a mortgage for up to 200000 and savings of 100000 in offset. Bank goes bust. You are left with 100000 debt and no "savings"

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No idea, but i'd love an answer as i have one too

I am pretty certain the debt which would still be owed to the bank is net of any savings lost in the bankruptcy.

After all, its one accounts versus another account, but the same parties, so all debt and credit gets netted out.

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A friend was describing his offset mortgage to me. (He's got a big house and the £200,000 mortgage facility is just there "in case he needs it".)

He described the statement he gets as follows: "The statement shows two pots. A £200,000 mortgage; and a £200,000 pot of savings. The interest rates on both are the same, and the net cost is zero."

Then he posed this question. "What happens if the bank goes bust? Are only £85,000 of my 'savings' protected, and the other £115,000 of 'savings' 'lost', leaving me with only a mortgage of £115,000?"

Remember, they are not really 'savings' and he's never actually borrowed any money. He just doesn't want to be suddenly lumbered with a £115,000 bill if the financial system goes up in smoke.

He knows that I tend to know all about this sort of thing; but I was flummoxed; then intrigued; then kind of excited! I knew I had to ask it here. If it is as potentially "bad for him" as he fears, it's seemingly another "secret scam" the banks have thought through and laid on the path to trap unsuspecting people with.

Does anyone know? Is this just a storm in a teacup (ie. my brain)?

from Love money:

The FSCS now states:

"If a bank were to go into default, the FSCS would consider the overall net claim. If the claimant's borrowings exceeded his/her savings, there would be no overall claim against the bank, and the claimant would not be entitled to any compensation.

For example, if a customer had a mortgage of £200,000 and savings of £150,000 with the same bank, set-off would be applied to the example above by the Insolvency Practitioner dealing with the bank failure. As a result, the individual would end up owing the bank £50,000. There would be no positive balance and no claim.

This cannot be assumed to apply to building societies, as there is no automatic set-off on insolvency".

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and further with the reform of the FSCS:

Offset mortgages

3.7 Moving to gross payment raises interesting questions in respect of a product which

deliberately uses the concept of set-off: offset mortgages. Two of the most common

types of offset mortgage are structured as follows:

• 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. This is very tax efficient for those who are taxed at the higher rate;

• type 2: a current account is combined with a mortgage account and operated as

one large overdraft (with a credit limit).

3.8 The first type detailed above is the most common. As the deposits are normally

separately identified from the mortgage balance, it should be relatively easy to

separate the two elements and calculate compensation entitlement on a gross basis.

In the case of the second type of offset mortgage, it may not be possible to separate

the deposit element from the mortgage element as it is simply viewed as one large

overdraft. The nature of the product is such that the FSCS would simply have to

treat it as an overdraft.

3.9 Where the deposit element of an offset mortgage can be separated from the

mortgage element (as with type 1), we propose that payout should be calculated on

a gross basis and the FSCS should pay out the positive balance of the deposit(s).

Where the deposit(s) and mortgage are combined and treated as one large overdraft

(as with type 2), the FSCS would have to simply treat it as an overdraft and so no

compensation would be paid out. Customers who have type 2 offset mortgages

would therefore receive no compensation in respect of amounts they have paid into

the account. This may result in a loss of access to liquid funds for a customer with

the second type of offset mortgage.

3.10 Our proposed treatment of offset mortgages is in line with what we are seeking to

achieve through gross payout and we believe it is the best way to deliver the benefit

of speeding up payout.We do, however, acknowledge that how we propose to deal

with payout for the second type of offset mortgages may leave these customers

without access to liquid funds. The only other practical alternative that we have

identified to deal with type 2 offset mortgages is to make a fixed payment of, say,

£2,000 which would be added to their mortgage debt.

Q6: Do you agree that that offset mortgages should be

treated as outlined?

Q7: Is there any other way we could deal with offset

mortgages?

Cost benefit analysis

Benefits

3.11 There

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There would appear to be a risk that the mortgage gets sold on and the savings account doesn't, then the outfit (a day later) goes bust.

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We've been having a long chat and he's been throwing out all sorts of scenarios.

For example, what if the bank goes bust, deposit insurance says you will get the £85k eventually, the rest offsets, but you are left with an £85k mortgage to service (at crisis rates), whilst earning zero interest on your "savings to come" as per the deposit insurance rules? You could go bust before you are paid enough to get the loan off your back.

He's opened a can of worms. I think he should write to his bank's chief exec (and copy it to the ombudsman and his MP and the press), asking for clarification of exactly how each scenario, no matter how unlikely they might think it, would be treated.

More than anything it's making me realise how entangled legal obligations are, and how unwieldy in high speed, Lehman collapse type moments, with all sorts of potential unintended consequences.

firstly, yes, it appears the FSCS doc I quoted is an open exploration of the clear legal issues with this type of mortgage....This is a problem when idiots produce "products" based on concepts of the mind rather than reality.

The wording of the "product" will be very important....for example, in the case of a debit card payment, the client beleives he has paid his bill himself, when in legal, product reality, he has done no such thing, so if payment doesnt arrive, the client is at a loss as to why anything has gone wrong and gets all wriled up when his fridge doesnt arrive.

Second, the FSCS is not "deposit insurance". It is a scheme paid for by banks that COMPENSATES people when financial things go wrong. There is an overall limit to the fund per year for ALL CLAIMS and I think its around 4.3 billion...sounds a lot but if Barclays goes TU, then its a drop in the bucket.

Clearly, as the FSA surmises, if the offset comprises two accounts, savings and mortgage, and there is a middle mechanism that calculates the offset interest, then it is clear, they can cancel one account against the other in full, in this case with even sums involved, he would receive no compensation from the FSCS. If the mortgage was greater than the savings, then he would still owe a lesser amount, having lost all his "cash".

In the other scenario, where the offset is a mortgage v a current account, ( where there is a mortgage and a current account with a 200K overdraft facility) where in this case monies paid into the current account reduce according to what you shove in excess of agreed mortgage monthlies, then there is here a case for no compensation again unless there is a surplus in the account. For example, your mate may have orginally had a mortgage for 400K and got an offset account with 400K overdraft to reduce monthly...he plonks in 200K.....he would in this case lose all and still owe the 200K less and repayments to capital.

He may have in effect paid off this mortgage with his savings, but att he moment, still has access to his savings....this implies that he has a further credit to him even though he thinks he has a zero net balance.

I think the two concepts are very subtle, and each "product" will have variations.

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Assuming the debt and credit are cancelled out (which I'm pretty sure they would be) there can still be problems.

Lets say you had saved 30K with the intention of buying a new car next year, but in the meantime are using that to offset the mortgage. Now the bank goes bust and those savings are automatically used to pay off a proportion of the mortgage (whether you wanted to or not). When the dust settles and you want to buy that car you will now have to pay for a remortgage, the new bank may refuse an equity withdrawal as they want to keep LTV as low as possible, so you could end up needing a higher rate bank loan in order to get the car.

For most people with significant savings, I don't see any great advantage to offset mortgages compared to just paying the mortgage off early.

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We've been having a long chat and he's been throwing out all sorts of scenarios.

For example, what if the bank goes bust, deposit insurance says you will get the £85k eventually, the rest offsets, but you are left with an £85k mortgage to service (at crisis rates), whilst earning zero interest on your "savings to come" as per the deposit insurance rules? You could go bust before you are paid enough to get the loan off your back.

He's opened a can of worms. I think he should write to his bank's chief exec (and copy it to the ombudsman and his MP and the press), asking for clarification of exactly how each scenario, no matter how unlikely they might think it, would be treated.

More than anything it's making me realise how entangled legal obligations are, and how unwieldy in high speed, Lehman collapse type moments, with all sorts of potential unintended consequences.

He should be safe because the offset account is actully just one account and the two set of numbers simply net each other off, hence why there should only be one account number and also why you don't pay any tax on your savings interest. If it were two separate accounts then you have to pay the tax on the one with a positive balance.

Second reason is because as you read elsewhere all accounts within the bank per customer are netted off.

But if your friend is still too worried by all of this, then just let him reduce his facility :)

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He should be safe because the offset account is actully just one account and the two set of numbers simply net each other off, hence why there should only be one account number and also why you don't pay any tax on your savings interest. If it were two separate accounts then you have to pay the tax on the one with a positive balance.

Second reason is because as you read elsewhere all accounts within the bank per customer are netted off.

But if your friend is still too worried by all of this, then just let him reduce his facility :)

not so...read the FSA documents quoted above.

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A friend was describing his offset mortgage to me. (He's got a big house and the £200,000 mortgage facility is just there "in case he needs it".)

He described the statement he gets as follows: "The statement shows two pots. A £200,000 mortgage; and a £200,000 pot of savings. The interest rates on both are the same, and the net cost is zero."

Then he posed this question. "What happens if the bank goes bust? Are only £85,000 of my 'savings' protected, and the other £115,000 of 'savings' 'lost', leaving me with only a mortgage of £115,000?"

Remember, they are not really 'savings' and he's never actually borrowed any money. He just doesn't want to be suddenly lumbered with a £115,000 bill if the financial system goes up in smoke.

He knows that I tend to know all about this sort of thing; but I was flummoxed; then intrigued; then kind of excited! I knew I had to ask it here. If it is as potentially "bad for him" as he fears, it's seemingly another "secret scam" the banks have thought through and laid on the path to trap unsuspecting people with.

Does anyone know? Is this just a storm in a teacup (ie. my brain)?

Yes - it will be gone. To be able to net these off, the mortgage deeds need to have a net off clause (which it doesn't).

But if this is with one of the big 4 bank - he got nothing to worry about really. If one of the big4 goes, we all have much serious thing to worry about...

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Yes - it will be gone. To be able to net these off, the mortgage deeds need to have a net off clause (which it doesn't).

But if this is with one of the big 4 bank - he got nothing to worry about really. If one of the big4 goes, we all have much serious thing to worry about...

why?...one of the big 4 failed in 1990 crash...Midland was totally busted.

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He won't be out of pocket. The amount the bank owes him (his savings account balance) will be netted or 'set-off' against the amount that he owes to the bank. Google 'insolvency set off'. I think it's less risky to save with a bank you owe money than to rely on the FSCS guarantee scheme. Add to that the income tax savings that an off-set mortgage gives you and it's definitely a very useful product.

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He won't be out of pocket. The amount the bank owes him (his savings account balance) will be netted or 'set-off' against the amount that he owes to the bank. Google 'insolvency set off'. I think it's less risky to save with a bank you owe money than to rely on the FSCS guarantee scheme. Add to that the income tax savings that an off-set mortgage gives you and it's definitely a very useful product.

depends which rule the receiver would use to calculate the settlement of the mortgage....if its to be sold on, they may well use rule of 78...depends on the contract.

Its not posters here suggesting the account is not so simple...its the FSA itself, and even they couldnt work it out.

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Asked the very same question myself (not that it was relevant re: amount of money was below compensation limit), the answer I got, 'well we will never go bust sir', roll on a few months and unfolds the banking crisis, lol. Anyway they didnt know the answer, even after going back to head office to find out.

As quoted above banks and building societys are different, I'd always play on the safe side though!

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After all, its one accounts versus another account, but the same parties, so all debt and credit gets netted out.

I'm not so sure that will always be the case. It would depend, I think, on the exact terms of the account(s) in question. A couple of obvious reason why the terms would state that the two could not be netted might be:

- the bank might want to be able to securitise the mortgage at some point, which they couldn't if it was tied up with a deposit in some way

- regulators might not like the idea that the bank could dip into your savings to take mortgage payments without your explicit permission

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one of the big 4 failed in 1990 crash...Midland was totally busted.

What are you talking about? Midland was nowhere near being busted. In fact, to this day, the Midland Bank legal entity has a higher credit rating than its parent (HSBC).

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What are you talking about? Midland was nowhere near being busted. In fact, to this day, the Midland Bank legal entity has a higher credit rating than its parent (HSBC).

it was bailed. it had huge exposure to South American debt and was a leader in low cost lending in the run up to the bust in about 1990.

As with the rest of the big four, it also suffered greatly in the business side.

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No it wasn't, you're imagining it. Provide some evidence if you believe otherwise.

Here is the official history.

Course, no banks suffered at all in the Great Housing crash of 1990....officially.

But the honeymoon did not last long. Crocker's financial performance began to falter almost from the moment Midland took it over, and it collapsed in 1983 when it posted a loss of $62 million for the fourth quarter. Plagued by bad real estate loans and a substantial share of Latin American debt, it went on to lose $324 million for its parent company in 1984, causing The Economist to exclaim in one headline, "What a big hole Crocker is making in Midland's pocket." Nevertheless, Midland stuck by its beleaguered subsidiary, even buying out the rest of Crocker's stock in 1985 after it hit its rock-bottom price of $16.25 per share, down from $90 in 1983. Before long, however, Midland decided that it had had enough. In 1986 it sold Crocker National to one of its California rivals, Wells Fargo & Company, for $1.1 billion, roughly the same amount of money that Midland had sunk into Crocker.

But the Crocker debacle did not end there. Five years of nursing a major acquisition had stunted Midland's capital base while its competitors increased theirs. So when Sir Kit McMahon, an Australian-born former deputy-governor of the Bank of England, became chairman and CEO in 1987, his first priority was to bolster Midland's capital by means of a rights issue and by selling assets. Profitable regional subsidiaries in Scotland, Ireland, and Northern Ireland were divested in 1987. In the same year, Midland Montagu was established, combining the group's treasury, global corporate, international, and investment banking businesses. Midland Montagu was the result of the merger of Samuel Montagu & Company; Greenwell Montagu Gilt-Edged, the leading British government bond primary dealer; and Midland's international corporate banking operations. Overall, the bank aimed to concentrate on its core domestic banking business, deemphasizing international operations.

Optimism about Midland began to surface again in the securities markets, and its depressed stock looked like a bargain. In 1987 several parties purchased substantial interests in the bank. Hanson Trust acquired 6.5 percent, tabloid publisher Robert Maxwell acquired 2.5 percent, and Prudential Insurance Company bought two percent. In 1988 the Kuwaiti Investment Office disclosed that it owned a 5.1 percent stake in Midland. All of this led to speculation in the financial press that Midland might itself become a takeover target. Midland reacted in late 1987 by agreeing to let the Hongkong and Shanghai Banking Corporation acquire a friendly 14.9 percent of its stock. Hongkong agreed to hold the stake for a standstill period of three years while the two banks consolidated and rationalized their international businesses, with Hongkong to concentrate on Asia and Midland on Europe.

Acquisition by HSBC

Midland's 1987 results illustrated that the bank was recovering from, but still seriously affected by, its disastrous international forays. Operating profits before provisions increased 18 percent over the previous year to £511 million, but because the bank was forced to take a huge provision for bad debt (primarily to guard against defaults on shaky Third World loans undertaken earlier in the decade), it posted an overall operating loss of £505 million. On the positive side, the asset sales, rights issue, and outside purchases of Midland stock had improved the bank's capital strength.

The three-year agreement between Midland and Hongkong was an important component of Midland's newfound domestic focus. For example, in 1988 Midland Bank Canada was transferred to Hongkong Bank of Canada. Although the agreement was not renewed in 1990, Hongkong retained its large stake in Midland. The two companies entered into merger talks in 1990, but the talks broke off late in the year because of what were termed "financial difficulties."

In 1991 Midland was still struggling to recover when McMahon resigned in March; he was replaced as chief executive by Brian Pearse, who had been finance director at Barclays. The same week as McMahon's departure, the bank announced that its dividend would be reduced from 18p to 9p, the first time in history Midland had cut its dividend.

Meanwhile, Hongkong reorganized itself in 1991, creating a new holding company, HSBC Holdings plc, and making Hongkong a subsidiary of HSBC Holdings. HSBC stock was set up on both the London and Hong Kong markets, showing the importance Hongkong placed on Europe (and London) for its future. This emphasis was borne out the following year when the long-anticipated merger of Hongkong and Midland finally occurred.

In March 1992 HSBC Holdings made a friendly takeover offer for Midland, amounting to 378p for each share of Midland stock. The next month Lloyds contemplated entering into the bidding with a hostile takeover offer of 400p per share. For Midland, a merger with HSBC would keep its domestic operation fairly intact; HSBC planned to earn back its investment from synergies that would develop between the two largely complementary operations. By contrast, merging with Lloyds would mean the end of the Midland name and huge reductions in branches and employees; Lloyds planned to cut costs dramatically to make the takeover pay off. The sharp differences between these choices quickly became moot when HSBC upped its offer in June to 480p per share, leading Lloyds to decide not to pursue Midland anymore, concluding that the price had grown too high. HSBC ended up paying £3.9 billion (US $7.2 billion) to acquire Midland. About the same time this deal was being concluded, Midland continued its focus on banking by divesting its travel agency subsidiary, Thomas Cook Group Ltd., through a £200 million (US $363.9 million) sale to the LTU Group, a German travel operator.

and so it goes on....they were really struggling

Saying that what happened to them should have been what happened to busted banks in 2007..

Edited by Bloo Loo

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Course, no banks suffered at all in the Great Housing crash of 1990....officially.

Of course they suffered and, in fact, some did go bust (remember National Mortgage Bank?) but Midland were not bailed out. Or do you want to try and redefine being taken over by a stronger institution as a government bailout now?

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Of course they suffered and, in fact, some did go bust (remember National Mortgage Bank?) but Midland were not bailed out. Or do you want to try and redefine being taken over by a stronger institution as a government bailout now?

Ok, it was a sale of the valuables, and HSBC took it over....the official history shows it as a nice deal, friendly as it says above....in Finance speak...friendly means "god thank you for taking this thing of our hands"

A mate of mine was in very close touch with a local manager at the time....and Mrs Loo still had contacts in the bank she worked in ( threadneedle Street) now a trendy wine bar.

So yes, they had failed and were bought out and saved...the share price had plummetted and for some reason, Lloyds were asked to make an alternative bid...sort of resonant with recent history.

Ill just repeat the phrase in the Company History, shown above: The two companies entered into merger talks in 1990, but the talks broke off late in the year because of what were termed "financial difficulties."

we all know what "financial difficulties" means.

Edited by Bloo Loo

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Ok, it was a sale of the valuables, and HSBC took it over....the official history shows it as a nice deal, friendly as it says above....in Finance speak...friendly means "god thank you for taking this thing of our hands"

A mate of mine was in very close touch with a local manager at the time....and Mrs Loo still had contacts in the bank she worked in ( threadneedle Street) now a trendy wine bar.

So yes, they had failed and were bought out and saved...the share price had plummetted and for some reason, Lloyds were asked to make an alternative bid...sort of resonant with recent history.

If you want to believe they were bust, then suit yourself, but that's a long way from the financial reality told by their accounts. At this point of course, you're going to say that the accounts are all lies and, to be honest, there's nothing much I can say to counter that since, in the world you seem to inhabit, the truth is exactly what you want it to be and all evidence to the contrary is to be ignored.

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If you want to believe they were bust, then suit yourself, but that's a long way from the financial reality told by their accounts. At this point of course, you're going to say that the accounts are all lies and, to be honest, there's nothing much I can say to counter that since, in the world you seem to inhabit, the truth is exactly what you want it to be and all evidence to the contrary is to be ignored.

I wouldnt say they are lies and they were rescued, and that rescue was by no means certain...they were certainly extremely hampered in day to day banking at the time...The accounts CANNOT show a bank as busted, as it would have to cease trading immediately. I am sure that every bank in the UK is properly valuing and and reporting its assets without prejudice.

interestingly here is some more history....maybe some lessons were there to be learned for later clever bankers:

In 1967 Midland scored another first when it purchased a 33 percent interest in the merchant bank Samuel Montagu. This marked the first merger in Britain between a merchant bank and a deposit bank and was taken as a sign that the Bank of England was willing to blur the traditional lines between financial companies. Midland wanted to diversify its activities and also sought Montagu's expertise in international markets, and Montagu felt that it would gain business among Midland customers.

During the late 1960s, as Midland shed its image as a banker's bank and a correspondent bank, it cofounded Bank Europ&eacute-e de Credità Moyen Terme and several other consortium banks, with Deutsche Bank, Amsterdam-Rotterdam Bank, and Société General de Banque, but later divested itself of these consortium banks.

In 1974 Midland increased its stake in Samuel Montagu to 100 percent. It also acquired another merchant bank, the Drayton Corporation, and merged it with Montagu. This stronger commitment to merchant banking did not work entirely to Midland's advantage, however; Montagu's financial performance had been solid, but Drayton came with many questionable real estate investments, causing Midland's position in merchant banking to slip somewhat after the acquisition. In 1982 it sold a 40 percent stake in Montagu to Aetna Life and Casualty, only to buy it back in 1985 ( the next boom in mortgages)

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