What happens to a large offset balance if the lender fails

An offset mortgage links a savings balance to a mortgage, but the two sit in different legal positions. The savings balance is a deposit held by a bank or building society. The mortgage is a debt you owe that same institution. If the institution fails, those two things are not simply cancelled against each other.

The deposit is protected, not set off against the loan

The Financial Services Compensation Scheme (FSCS) protects deposits, and an offset balance is treated as a deposit in the same way as an ordinary savings account. If the lender fails, the FSCS compensates you for that deposit up to the limit it applies. The mortgage debt does not fall by the amount you held offset. It stays in place and continues to be collected, normally by whoever takes over the failed lender's loan book.

The limit applies across everything you hold with that institution

FSCS protection is calculated per banking institution. If you hold offset savings, a current account and another savings account with the same bank or building society, those balances are added together for the purpose of the limit.

Checking which institution actually holds your balance

Large banking groups often run several brands under one banking licence, so the name on your mortgage statement is not always the name the FSCS limit is calculated against. Before relying on a large offset balance being fully covered, it's worth checking which licence your bank or building society operates under and what the current limit is at fscs.org.uk, since the limit can change.

Where a balance sits close to or above that limit, splitting it across institutions, or discussing it with a qualified independent mortgage or tax adviser, is a decision worth making deliberately. You can set out your own mortgage balance, savings and tax position on the about page for context on how this site approaches that kind of figure.

The protection that applies if a bank or building society fails is attached to the banking licence it holds. A current account, an offset savings balance and a mortgage can all sit under the same brand name, and whether they are treated as one claim or several depends on how many licences sit behind that name.

Current account and offset savings under the same brand

Where your current account and your offset savings are held under the same authorised firm, the two balances are added together for the purpose of the limit. Some banking groups trade under several brand names that all share one licence, in which case money held across those brands counts as one holding too. Other groups keep separate licences for separate brands, in which case each is assessed on its own. The way to find out which applies to your own accounts is to check the banking licence named in your account terms, or ask the institution directly.

The mortgage is a separate debt

The money you owe on the mortgage and the deposit the bank owes you are two different obligations. If the lender failed, the deposit protection scheme does not reduce your offset balance by what you still owe on the mortgage before working out what is protected. The two are not netted against each other for this purpose.

Checking where you stand

If your current account and your offset savings together come close to or exceed the protected amount, the usual way to reduce the exposure is to hold the surplus with a separate institution that does not share a licence with the first. The limit itself is set by the Financial Services Compensation Scheme and can change, so it is worth checking the figure currently shown at fscs.org.uk.