Got an offset mortgage? How new compensation rules could affect you

The amount of compensation you can claim from the Financial Services Compensation Scheme (FSCS) if your bank fails is changing from January 1 next year.

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But this move doesn’t just affect savers – it will also impact you if you have an offset mortgage and use your savings to reduce the amount of interest you pay.

Here’s what’s happening and what it could mean for you.

What is the FSCS?

The FSCS currently provides cover of up to £85,000 per person, per institution, in the event a bank or savings provider goes bust.

So, if you have this amount stashed in your savings account, and the bank that account is held with runs into financial difficulties, the FSCS will ensure you don’t lose out.

What’s changing?

The FSCS limit is going to fall from £85,000 to £75,000 from January 1 next year.

The limit was actually changed on July 3, but there’s a six-month transition period for people to adapt before the lower limit comes into effect.

Why is the limit dropping?

The FSCS deposit protection has to be recalculated by the Prudential Regulation Authority, which is in charge of the scheme, every five years.

As the £85,000 compensation limit was last set in December 2010, it’s now time for a new limit to be introduced.

The FSCS limit is going to fall from £85,000 to £75,000 from January 1 next year

The limit must be set at a sterling amount equivalent to €100,000. It has fallen because of the strong sterling exchange rate against the Euro.

Why am I affected by the limit change if I have an offset mortgage?

An offset mortgage enables you to link your savings, and often your current account, to your mortgage. Rather than earning interest on your savings, you don't pay it on the equivalent amount of your mortgage debt.

As you don't earn interest on your savings, there is no tax to pay on them, and you can still access your money at any time.

The compensation limit change means that if you offset more than £75,000 of savings against your mortgage, or £150,000 if it’s a joint account, and your mortgage provider fails, any amount over the FSCS limit will be used to reduce your mortgage debt.

A spokesman for the FSCS explained: “If the mortgage/loan and deposit accounts are separate, FSCS would pay compensation on the savings element up to the limit of £85,000 (£75,000 from January 1, 2016) and the remainder would automatically be set-off against the amount owed under insolvency law.

“So for example, if your outstanding mortgage totalled £150,000 and you had savings of £95,000, you would receive £85,000 in compensation (£75,000 from January) and the remaining £10,000 (or £20,000 from January) would go towards the mortgage.”

However, if you have a current account mortgage, whereby a deposit account is combined with a mortgage account and operated as one large overdraft, the FSCS would have to treat it as money owed and you aren’t entitled to any compensation.

What can I do about the limit change?

Check how much you are currently offsetting. If you’re offsetting over £75,000, you may want to move any funds over this limit out of your offset mortgage into a different savings account (with another provider). You should only do this if you don’t want these savings to go towards paying off your mortgage debt should your mortgage provider run into difficulties.

So, for example, if you’re currently offsetting £85,000, you might want to look at transferring £10,000 of this to another savings provider before the limit drops on January 1.

That way, if your offset mortgage provider does go bust, you’ll be able to hang on to your savings nest egg.

Are there any other options?

Yes, you could just keep any funds above the FSCS limit in your offset account rather than transferring it into a different savings account. You won’t lose out financially if you do this because if your provider runs into financial problems, any surplus will be used to repay your mortgage.

Alternatively, if your mortgage allows overpayments, you could use any funds above the FSCS limit to pay off some of your mortgage capital.

David Hollingworth of London & Country mortgage brokers said: “It makes sense to keep the amount of cash under review and either overpay any surplus if the mortgage allows, or move it to another institution.”

Is there anything else I should know?

It’s also worth checking if your offset mortgage provider shares the same banking licence as any institution you have savings accounts with.

For example, First Direct, which is one of the main providers of offset mortgages, shares the same licence as HSBC.

That means if you have £20,000 in a savings account with HSBC, and you’re also offsetting £70,000 of savings against your First Direct mortgage, you’d only be able to claim compensation of £75,000, potentially leaving £15,000 of your money (the portion over the limit) at risk.

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