Mortgage Off Set account protection question

[Fats25]

We have a Mortgage with an off-set savings account, on a UK property. The property has approx 50% equity on current re-sale values, and 15 years left on the length of mortgage. We are currently living abroad, and renting the property out, therefore someone else is paying the mortgage (actually the rental income is approx 40% above the mortgage payments). At the end of each annual tenancy contract, we use the overpayment (minus any fees) to directly pay the mortgage off, and reduce the term.

Any money we get back to the UK, we just put into the off-set bank account. This offset bank account has now gone above the £85k government protection limit, and I was thinking what I should do. Firstly I contacted the Building Sociey that we have our mortgage with, and they really didn't know the answer, however eventually stated that as it was an off set bank account, it is not protected as such, however in the case of a failure it would be calculated off of the mortgage payments I owed. i.e. if I owed £200k, and had an offset balance of £100k, then when the "next bank" took on the mortgage, the mortgage would be £100k.

Subsequent to this quandary of mine I have read that the protection is £85k per person, and it is a joint account. So from what I have read even if this was a normal savings account, we would be protected up to £170k for a joint account. Is that correct?

I have no reason to think this Building Society will fail, but it has got me thinking. The reason the money is in an off-set bank account in the first place, rather than me paying the mortgage down, is it is my rainy day fund. Due to being an ex-pat, in a volatile job market, and previously being a self employed consultant, I like to keep a couple of years cash available in case I require it. Now if the building society failed, and the savings were swallowed by the mortgage loan, that wouldn't be good for us.

I also have a desire to pay the mortgage off, and I am now at the point where the off-set mortgage account has reached my rainy day fund ceiling, so anything in future can be used to directly overpay the mortgage.

So the questions:-

Is the information I've been given by Building Society correct?
Do I need to think about an alternative vehicle for these rainy day funds?
If so - what is best? (I am classed as a UK Non-Resident for Tax purposes so please bear in mind). I would say I would need to be able to get to rainy day funds inside 90 days.

[tighnamara]

Hi an you be a non UK tax payer with a house you let and money being available each year to pay down the mortgage
Is the mortgage a buy to let?

[Wombat3]

tighnamara said:

Is the mortgage a buy to let?

A small wager says it probably isn't. (not aware of any "offset" BTL mortgages).

In which case suggest the OP treads carefully before the lender gets wind of it and shuts the thing down overnight & uses the funds in the offset account to pay off the mortgage!

[Fats25]

Thanks for your concerns guys! However they are unwarranted.

The property is not on a BTL mortgage. Lender was informed that we would be moving abroad, and renting the property out, and they were fine with it. Is all in writing. The lender at the time was not providing BTL mortgages, and I assume they preferred a good customer servicing their mortgage, rather than taking the mortgage elsewhere. Likewise - my Life Cover - which states is only open to those residing in UK, was also honoured (and received in writing). Is amazing how flexible companies can be if you are honest and up front on your circumstances!

Before the next question - our annual Tax self assessments declare all rental income. Suprisingly, there is still some form of Tax relief as homeowners, even as Non-Residents, so has not actually cost me a penny in tax either.

Back to the questions please!

Edited by Fats25 on Tuesday 28th March 10:02

[DonkeyApple]

Usually with offsets you can actually pay the debt down within a set of stipulated parameters as well as just using the offset facility.

If that is the case then maintain your offset account at the balance you feel secure with and use all excess funds to physically pay down the loan?

[tighnamara]

Fats25 said:

Thanks for your concerns guys! However they are unwarranted.

The property is not on a BTL mortgage. Lender was informed that we would be moving abroad, and renting the property out, and they were fine with it. Is all in writing. The lender at the time was not providing BTL mortgages, and I assume they preferred a good customer servicing their mortgage, rather than taking the mortgage elsewhere. Likewise - my Life Cover - which states is only open to those residing in UK, was also honoured (and received in writing). Is amazing how flexible companies can be if you are honest and up front on your circumstances!

Before the next question - our annual Tax self assessments declare all rental income. Suprisingly, there is still some form of Tax relief as homeowners, even as Non-Residents, so has not actually cost me a penny in tax either.

Back to the questions please!

Edited by Fats25 on Tuesday 28th March 10:02

Just interesting that a non UK tax payer can have a considerable amount of money off setting a rental property (where additional profit is made) yet have no tax penalty but someone staying in UK and paying taxes could be paying tax on equivalent money sitting in a bank account where they are taxed.
Suppose it shows up as another example of how flawed the UK system is with regard to taxes.

Presuming this will change for you with the new rules on BTL ?

To answer your question (only my understanding on my mortgage - and may be wrong), any money offsetting the mortgage would be taken off the outstanding mortgage figure. (not capped at £85,000)

Edited by tighnamara on Tuesday 28th March 13:16

Edited by tighnamara on Tuesday 28th March 13:17

[TooMany2cvs]

If you have £200k mortgage, and £100k credit balance in the account, then you have a net balance of £100k debt. The fact that they show the two pots as separate balances doesn't make a difference. Stop worrying!

[Fats25]

DonkeyApple said:

Usually with offsets you can actually pay the debt down within a set of stipulated parameters as well as just using the offset facility.

If that is the case then maintain your offset account at the balance you feel secure with and use all excess funds to physically pay down the loan?

You are right, and that is what I am doing. My mortgage has no limit on overpayment, and or early payment, and I am now at the balance/savings I am happy with. Anything additional will be used to overpaying mortgage.

My only fear - and hence the question - is are those savings protected? That's all I am looking to understand.

[DonkeyApple]

Fats25 said:

DonkeyApple said:

Usually with offsets you can actually pay the debt down within a set of stipulated parameters as well as just using the offset facility.

If that is the case then maintain your offset account at the balance you feel secure with and use all excess funds to physically pay down the loan?

You are right, and that is what I am doing. My mortgage has no limit on overpayment, and or early payment, and I am now at the balance/savings I am happy with. Anything additional will be used to overpaying mortgage.

My only fear - and hence the question - is are those savings protected? That's all I am looking to understand.

The only savings being the cash held in the offset account? So long as the entity holding those funds has a U.K. banking license is holding your funds under retail terms and you are personally eligible to be covered by the FSCS then you should be fully covered up to the threshold.

[Fats25]

tighnamara said:

Just interesting that a non UK tax payer can have a considerable amount of money off setting a rental property (where additional profit is made) yet have no tax penalty but someone staying in UK and paying taxes could be paying tax on equivalent money sitting in a bank account where they are taxed.
Suppose it shows up as another example of how flawed the UK system is with regard to taxes.

Is it? I think I am in same situation as anyone else. If a UK resident offset their mortgage with savings, there would be no tax. Likewise if I was making interest on a normal savings account, I would declare in on my self assessment, and I suppose taxed accordingly.

With regards to profit made, I believe property prices can rise and fall, it is not a guaranteed profit. That will only be known when the property is sold.

If you mean the profit made on rental over Mortgage Payments, it is not really a profit is it? I was always overpaying the mortgage anyway. The mortgage payment is only a fixed amount determined by the amount borrowed, and length of time I chose when taking the mortgage. It is just a number to be repaid. All declared (as per a UK tax payer) on self assessment.

tighnamara said:

Presuming this will change for you with the new rules on BTL ?

I'm not sure.

I will be honest I didn't think so, but I have not read up on this to be 100% sure, and not spoken to my accountant yet if there is anything that changes.
Only changes I was aware of were related to purchases (change to Stamp Duty), and sales (related to CGT). I believe there will be a CGT liability, if I sell the house without living back in it, but I have not looked into it in detail as I have no intention to sell at this time. I know there is also some relief lost with regards to the interest repayment that I think has been removed now.

Just to be clear, in my opinion it is my home, that I am renting out to cover the cost of the mortgage. It is not a BTL property. Maybe different in the eyes of the law, but that is how it feels to me.

Edited by Fats25 on Tuesday 28th March 14:24

[tighnamara]

Fats25 said:

I'm not sure.

I will be honest I didn't think so, but I have not read up on this to be 100% sure, and not spoken to my accountant yet if there is anything that changes.
Only changes I was aware of were related to purchases (change to Stamp Duty), and sales (related to CGT). I believe there will be a CGT liability, if I sell the house without living back in it, but I have not looked into it in detail as I have no intention to sell at this time. I know there is also some relief lost with regards to the interest repayment that I think has been removed now.

Just to be clear, in my opinion it is my home, that I am renting out to cover the cost of the mortgage. It is not a BTL property. Maybe different in the eyes of the law, but that is how it feels to me.

Edited by Fats25 on Tuesday 28th March 14:24

I am referring to your comment in opening post that you make 40% over what your mortgage payment is each month and use that to pay down the mortgage by topping up the offset side.
I thought that was generated income but may be wrong, just interested why you can simply use this money as your own with no tax implications.

I was on the understanding that where there is any profit from renting a property tax had to be paid (obviously minus costs etc) but if you are imply putting any profit from the let in the off set side to pay down the mortgage sounds a great deal to me.

Probably me being stupid but it seems to good a position to be in without having any tax implications.

[Sarnie]

tighnamara said:

Fats25 said:

I'm not sure.

I will be honest I didn't think so, but I have not read up on this to be 100% sure, and not spoken to my accountant yet if there is anything that changes.
Only changes I was aware of were related to purchases (change to Stamp Duty), and sales (related to CGT). I believe there will be a CGT liability, if I sell the house without living back in it, but I have not looked into it in detail as I have no intention to sell at this time. I know there is also some relief lost with regards to the interest repayment that I think has been removed now.

Just to be clear, in my opinion it is my home, that I am renting out to cover the cost of the mortgage. It is not a BTL property. Maybe different in the eyes of the law, but that is how it feels to me.

Edited by Fats25 on Tuesday 28th March 14:24

I am referring to your comment in opening post that you make 40% over what your mortgage payment is each month and use that to pay down the mortgage by topping up the offset side.
I thought that was generated income but may be wrong, just interested why you can simply use this money as your own with no tax implications.

I was on the understanding that where there is any profit from renting a property tax had to be paid (obviously minus costs etc) but if you are imply putting any profit from the let in the off set side to pay down the mortgage sounds a great deal to me.

Probably me being stupid but it seems to good a position to be in without having any tax implications.

40% over the mortgage payment does not neccesarily equate to 40% profit.............

[tighnamara]

Sarnie said:

40% over the mortgage payment does not neccesarily equate to 40% profit.............

Understand that.
Opening post from OP states that money made from the rental after costs goes straight into the offset account with no tax being due.
Maybe I am being a bit ignorant on finances and tax implications as I presumed tax would be due on any money (profit after costs) being used to directly off set the mortgage as it is basically paying down a mortgage tax free.

Great deal for OP as it's a win win, keeps his house in UK, pays down loan with profit from renting house whilst paying no tax.

[TooMany2cvs]

tighnamara said:

Opening post from OP states that money made from the rental after costs goes straight into the offset account with no tax being due.
Maybe I am being a bit ignorant on finances and tax implications as I presumed tax would be due on any money (profit after costs) being used to directly off set the mortgage as it is basically paying down a mortgage tax free.

Great deal for OP as it's a win win, keeps his house in UK, pays down loan with profit from renting house whilst paying no tax.

Given that the OP is not UK resident, his UK agent is legally required to withhold tax before sending it on, unless he's already submitted a form to HMRC.
https://www.gov.uk/tax-uk-income-live-abroad/rent

[tighnamara]

TooMany2cvs said:

Given that the OP is not UK resident, his UK agent is legally required to withhold tax before sending it on, unless he's already submitted a form to HMRC.
https://www.gov.uk/tax-uk-income-live-abroad/rent

That's a lot clearer, so there is tax paid on profit
OP post implied no tax was due but can understand now if it is paid by the agent before he receives any payment.
Thanks for that.

[DonkeyApple]

swerni said:

DonkeyApple said:

Usually with offsets you can actually pay the debt down within a set of stipulated parameters as well as just using the offset facility.

If that is the case then maintain your offset account at the balance you feel secure with and use all excess funds to physically pay down the loan?

What'e the benefit of that?

As 2CV says, the net of it all is he is still in debt to the bank, the £85k protection is irrelevant

None but the OP mentioned he wanted to pay the mortgage down and seemed to imply that his 'rainy day' fund level was about where the FSCS level was. But maybe I misunderstood.

Personally, with my offset I also keep cash in an account under a different banking license as although in the event of a default my offset cash would physically reduce the mortgage size at the replacement lender it would be inconvenient to not have any cash reserves.

[TooMany2cvs]

DonkeyApple said:

None but the OP mentioned he wanted to pay the mortgage down

So he needs to pay more money into the offset account...

[DonkeyApple]

TooMany2cvs said:

DonkeyApple said:

None but the OP mentioned he wanted to pay the mortgage down

So he needs to pay more money into the offset account...

Not the same, technically speaking. Obviously to all intents and purposes they achieve the same but one is offsetting the other is paying down.

[DonkeyApple]

swerni said:

I'm risk adverse, however the thought of HSBC going tits up doesn't keep me awake at night

On some level it would be nice to watch though.

OP mentioned a building society and some of those are still looking pretty weak. Plus, it was some of these entities that ran their old offset products under two different licenses meaning your offset savings wouldn't be matched against your debt.

I think that all people need to vaguely concern themselves over a modern offset is whether it's Type1 or 2 and even that is pretty negligible.

[Fats25]

tighnamara said:

TooMany2cvs said:

Given that the OP is not UK resident, his UK agent is legally required to withhold tax before sending it on, unless he's already submitted a form to HMRC.
https://www.gov.uk/tax-uk-income-live-abroad/rent

That's a lot clearer, so there is tax paid on profit
OP post implied no tax was due but can understand now if it is paid by the agent before he receives any payment.
Thanks for that.

Forms completed as soon as non-resident status accepted. No Agent. No tax collected by anyone before rent received. Just a self assessment each year. To date this has not resulted in any tax being due. It may well change under the new BTL rules, as I believe I have lost some of the relief.

Anyway - I have answered a lot of questions on here, but the only one that has got close to answering mine is DonkeyApple. What is a Type 1 and Type 2? I don't know what this means.

To summarize my questions as I probably waffled too much:-

1) If a building society goes under, and I have 100k in mortgage, and 100k in offset savings. Do I walk away with 0 mortgage, and 0 savings? Is that how it works?

2) If that is the case, I would appear to be foolish to keep my savings in an offset account, as it would be silly to have a house, but no way to afford to run it (if the rainy day happened). Where should I think about putting a portion of this money - understanding I an a non-resident, and would need access to the money within 90 days?

3) On a normal savings account for a joint account - is the limit 85k or 170k (2 x 85k)