Saturday, July 5, 2008

Nice little gotcha hidden in the government’s largess to savers

Credit crisis: How safe is your bank?

n addition to lifting the maximum compensation payment from its current level of 100 per cent of the first £35,000 per person lost to £50,000 per person, the Treasury proposes to discount any debts individuals may have to failed institutions when calculating compensation. At present, mortgages and other loans outstanding can be taken into account to offset compensation paid for deposits lost. So if you owe the bank more than you have in savings with it, you are not entitled to any compensation. Fair enough, so don't save with the bank you have a mortgage with is the message. Otherwise they can basically eat up your savings to pay off as much of the mortgage as they can when *they* go bust, even if you are making your payments. Nice.

Posted by last_days_of_disco @ 01:29 PM (1027 views)
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6 thoughts on “Nice little gotcha hidden in the government’s largess to savers

  • Offset mortgage anyone?

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  • Entirely as it should be — you want your savings back but not to be responsible for what you owe, is that it? It’s this sort of self-interest that got the housing market into its current state

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  • Doesn’t make sense that you should avoid saving with the bank where you have a mortgage. If you owe them more money than they owe you, and they go bust, you’re fine, because your debt disappears, right? What’s the difference between owing them 100k and having 25k of savings and owing them 75k? You think that if they go bust you lose your 25k and you still owe them 100k? Doesn’t make sense

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  • little professor says:

    Gotcha?? I think you’ve got it the wrong way around.

    At the moment if a bank goes bust, your debts to that bank are offset against your savings – so if you have £30k savings and a £100k mortgage, you will lose the £30k without compensation, and still owe the £100k on the mortgage to the banks receivers.

    Under the new proposals any debt that is subtracted from the savings compensation would be written off, so you would lose the £30k, but you would only owe £70k on the mortgage, meaning you won’t lose anything overall.

    It’s actually a much better deal for savers and offset-ers.

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  • last_days_of_disco says:

    And what happens to your cash flow?

    You don’t instantly owe your whole mortgage the next day if the bank goes bust, there would be a negotiation of new terms on the mortgage, your payments will probably go up but you are protected by all kinds of laws and the banks can’t do what they like. It is much better than the summary theft of your savings without your consent. Try it and see, you might find it un-fun.

    You would not instantly lose your 30k of savings. Cashflow is what kills, not debt. It means people who are servicing their debt who have savings could have their savings wiped out if they held their savings with the same bank. This makes them much more vulnerable if not wipe them out on the spot. Just when they will probably need their savings the most, they will be gone. Yes their long term debt will be reduced, but how do they eat today? The bank isn’t going to lend them anything.

    If you have ever had a bank do this to you when you are servicing a debt and they decide in their wisdom to pay off that debt with your savings account (read your terms and conditions, all banks say they can do this at their discretion), you will know exactly how disastrous it can be. They have no idea how money is made remember, they only count beans.

    It *is* a huge gotcha. Do not save with the same institution you have a mortgage with if its a lot of money (like 30k). Its a really bad idea. When a bank is bust it is not going to care for you.

    Eating requires money. Saying, “Hey but at least my long term debt is reduced by 30k” is not going to comfort you.

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  • little professor says:

    Sure, I agree with you losing £30k savings is far worse than having £30k written off your debt.

    But the point is, you would lose your £30k under both the old system and the proposed new system. At least with the new system you get the minor sweetener of having the money written off your debt.

    Of course, the ideal would be for them to just compensate you for the savings you’ve lost, and leave the debt figure alone.

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