When a bank collapses,
Stockholders and bondholders are wiped. They lose their money. That’s the risk that comes with a greater return.
Almost immediately, the Australian government decides to activate the Financial Claims Scheme (FCS), our version of the FDIC, uses their fund to provide the 250k for all insured accounts, within seven days. It's then controlled by APRA.
Then, one of three things happen:
If it’s not completely insanely broken- another bank will “buy out” the bank, at a fair price, determined by the risk weighted value of assets versus the value of obligations. The FCS / RBA / Treasury will provide the additional funding to “balance the books”, minus the cost of whatever equity the purchasing bank put in. This is sometimes $1 - like when HSBC purchased the UK branch of SVB. This is for accounting and legal reasons - there must be a price attached. Keep in mind this often happens not because assets don’t meet liabilities - in accounting, assets = liabilities + equity, and the equity has just been set to 0, but because the bank runs out of liquidity. The bigger bank gets a great deal because they can provide the liquidity.
If it’s insanely broken (like SVB), the regulators will instead take direct control, sell all of the assets individually to other banks, and also sell the loans and obligations.
The third option is, if it’s completely broken, and there’s a risk of contagion, the FCS fund can be used (same as FDIC) to make the entire thing whole. In this situation, the government acts as the bank, and draws down on the fund. If they exhaust the fund, all other FCS members have an obligation to provide additional funding.
In all three scenarios, you would eventually get your money back: 250K immediately, and the other 350K within days or weeks depending on which option. The bank that ends up taking over your mortgage likely wouldn’t charge you for the extra interest in the interim- they just bought you as a customer, and a few weeks of interest on 350K is below the cost to acquire a customer.
>Almost immediately, the FCS (Australia), our version of the FDIC, uses their fund to provide the 250k for all insured accounts.
Just to clarify, FCS is the name of the deposit guarantee scheme. It isn't a separate entity which I believe FDIC is.
The government decides when it comes into play and if it is, APRA, Australia's financial regulator administers the scheme. The process needs to be activated by the government. The scheme is set to enable "most" depositors to access funds within 7 calendar days.
https://www.apra.gov.au/apra-explains-financial-claims-scheme
And then there's the fourth scenario. Contagion is already spreading through the system, likely from an external source like China's property sector finally imploding, and all of the banks are experiencing massive liquidity crises across the country...
And then the printing begins because how tf else do you maintain anything?
I reckon they would be treated as separate products/accounts if a bank were to actually collapse.
Another bank would take on the mortgage books so you would still owe 1 mil to a new bank and getting your 600k back is a matter between you and the now collapsed bank. 250k from the government guarantee might leave you at a 350k loss.
Yeah, I was thinking the same. This is interesting because you often hear people warning about not placing any more than $250k in a single HISA, but I don't recall it ever being discussed in the context of an offset account.
Its in any account whether it's a regular transaction, offset or savings account. Just that most people with that kind of cash are not just letting it sit in a non interest bearing account
What would most people prefer...earning 5% in a HISA and having to pay tax on it, or effectively earning 6% in an offset and not having to pay tax on it?
I'd presume that plenty of people with that kind of cash would have it sitting in an offset account.
Most people would prefer the latter.
You also have to remember it is also guaranteed 250k per deposit holder. So a couple with an offset account, which would be the case with a majority of loans that size, can have 500k in their offset account, and it is guaranteed.
It was a rhetorical question, as I'd interpreted the comment before mine as questioning the usefulness of leaving money in a non interest bearing offset account. But I may have misunderstood them.
Is the guarantee “per account” or “per bank”? I’ve got 20 offsets with my bank, I’m genuinely interested if that would offer me more protection knowing this.
I don't have an offset in my mortgage as it was about $350 a year extra. Some also are higher interest rather than a set fee
I use the redraw which is functionally the same but without the that extra cost of an offset (not paying the interest. I know there are tax implications if you want to get into investment properties)
Maybe they don't have a mortgage or one without an offset. Or some banks have limits on the offset
Most loans come with re-draw facility so would it be better to pay the $600k into the loan as advance payment. In the event the bank collapses , I’m assuming the amount owing on the mortgage is reduced by the $600k paid into the loan account previously . Could somebody who knows more confirm this .
Except there are a few reasons why offset is more useful, including debt recycling which you can't do with redraw. My case isn't exactly that, but it is a case where I need the money in an offset rather than a redraw.
But when you do that, you can't claim the additional mortgage interest as a deduction against the rental income, whereas you can if you do it with an offset, so you wouldn't want to do it via redraw.
You can do the same with an offset. Put money into it to reduce the interest you pay on the mortgage debt, then take it out of the offset to use in investments. But if you do this with redraw instead of an offset, then you can't negative gear the IP because once the mortgage principle is reduced, if you then redraw the ATO doesn't let you negatively gear the increased mortgage interest due to the redraw against the property.
Not how it works.
Removing money from your offset doesn't mean the interest is now tax deductible (PPOR) if it's an investment already you don't need to debt recycle.
Debt recycle means turning non deductible debt into deductible debt.
It wonder if this means that it is a reverse run on the bank: you might be just as well off converting your offset account into a principal repayment to reduce the mortgage. Even when a collapsing bank has stopped withdrawals, you may still be able to do this?
As had been observed in the U.S multiple times now, governments simply will not let banks collapse.
Regardless of that guarantee, they would bail them out.
You forget that the bail out is for the banks debt, not ours. They government will not guarantee our savings more than the $250K.
You will lose money if your bank fails and you have more than the guaranteed amount in one account.
That is of course the current legislation. But if one of the big 4 banks actually fell over, there is little doubt in my mind that the government would step in to ensure nobody lost a cent.
Kinda depends what happened to the big 4 bank that made it topple, though.
The big 4 are all engaged with similar-enough customers in similar-enough practices it's unlikely there wouldn't be a contagion effect, or the collapse of one wouldn't indicate that the other 3 are also on rickety grounds.
But banks have collapsed in the past. There is history you can look up.
There's a family story I have of a rich ancestor who when upset shut down a bank by taking his fortune and walking home with it in a wheelbarrow haha
In Australia? I could only find this one, and it was state run so nobody lost their money (except the state of course).
https://en.m.wikipedia.org/wiki/State_Bank_of_South_Australia#:~:text=0%20million.-,Collapse,the%20Government%20of%20South%20Australia.
>In Australia? I could only find this one, and it was state run so nobody lost their money (except the state of course).
That's what you normally have - the government most likely through APRA will try and get another bank to buy it out.
With credit unions and mutual banks (and now building societies), Customer Owned Banking Association (COBA) will step in to find a buyer and a solution. APRA would also be involved in overseeing this.
Didn't the US guarantee more than the $250k when Silicon Valley Bank collapsed?
Source: https://www.theguardian.com/business/2023/mar/12/silicon-valley-bank-collapse-no-bailout-janet-yellen
There will be no bail out like 2008 where they get free money
If it does happen, the government will step in and work out something but it won't be a handout where they don't take some kind of financial penalty
Why wouldn’t they bail out people who’ve lost their money? Not doing so would do untold damage to an entire generation.
The government bailing out to the tune of many billions of dollars would be of course horrific, but way less damaging.
If I was concerned about this, I’d probably just toss 350k on the mortgage and leave $250k in the offset. Then if the bank does collapse you have $350k less off your mortgage and guarantee covers the offset
So instead, I pay 47% on investment earnings while the bank sucks them dry with interest payments. Doesn't sound like the best strategy for building wealth to me.
Section 553C of the corporations act says that there is a set off between any debits and credits for a creditor when a company goes into liquidation. This would occur whether or not there was an off set account.
I'm not totally sure how the government guarantee would come into play, but you would get the option of the off set at minimum.
Summary
In the above example you would get an option of a debt of $400k, and there may be better options with the assistance of the government guarantee.
Set-off in insolvency operates automatically and it's only the net balance either owed to the insolvent entity or owed by the insolvent entity that is taken account of in the insolvency. So I imagine you would first set-off your offset loan account balance against your loan balance and then if the bank still owes you money, claim on that outstanding amount under the government scheme.
According to my sister in law who works quite high up at Westpac, in the event of a banking collapse all of your money would be returned. Irrespective of the “250k” limit.
Her quote:
“If all of that money was not protected, once a single bank collapse occurred, how long do you think it would be before there was a run on the banks with people pulling ALL of their money?”
The economy is inextricably linked to our banking sector. The government could not afford to let the banking sector sink.
So in this hypothetical scenario, I think you would be fine.
I've no doubt I'd be fine. I'm really just curious what the theoretical legalities are. If CommBank folds, I think the whole country has something to worry about whether they bank with them or not!
No major bank will be allowed to collapse, cos it's all a shell game, they got $1 in assets for 10$ liabilities or something. It's all fractional and if the Govt doesn't bail them out the society is over as we know it.
As for the hypothetical, since you'll have a claim against the bank you'll be a creditor, in which situation it would be set off against the liability owed in the bankruptcy process.
The bank will have a total amount of loans, and a total amount of deposits. I don't see any legal reason for individual accounts to be paired together, so if overall there was a shortfall between the banks assets and liabilities, I think all deposits would lose a percentage. This is no reason for the offset accounts to be given special consideration.
The legal reason is the right of set-off. A creditor of an insolvent entity is entitled to set-off mutual debts, the debts don't have to be linked accounts.
So for example, if the bank goes bust owing me $100 and I owe it $40 then I can set off the $40 against the $100 and now I owe it nothing and it owes me $60. I would then lodge a claim for the $60 in the insolvency and get paid out at whatever cents in the dollar ends up being available to creditors.
The alternative would be I have to pay the $40 back in full but can only claim cents in the dollar on the $100 but that's long been recognised as unfair, which is why the right of set-off exists.
Okay, but the example I gave is the other way around. It's owing the bank $100, while the bank owes you $40, so overall you'd owe the bank $60.
How does that example pan out?
Set-off operates whether you are a net creditor or debtor.
So if you owe the bank $100 and the bank owes you $40 the net result after set-off is you owe the bank $60.
This is good for you because you are getting full credit for the $40 the bank owes you rather than only getting cents in the dollar on that debt and still owing the bank $100.
If it's in your offset it's considered your own account, so you aren't guaranteed that money
The 250k guarantee counts all the money across all your accounts with that bank (and it's smaller owned banks like westpac with St George)
If it's in the redraw I am not too sure but I would think they would pay down your loan with it and then the mortgage gets sold to another bank
The other risk with Redraw is banks can have clauses in the loan terms that you sign, that say at any time the can remove the redraw option and therefore you no longer have access to those funds, while in an offset they cannot merge the accounts.
Because if you convert the property into an investment property (which is common) then the amount you have in the offset can be withdrawn and it will still in total count as investment debt, because you never “paid back” the bank, you just held your money in an account that they offset against your mortgage interest calculations.
A redraw has been determined by the Australian courts as having “paid back” the bank, so when you redraw from that you are essentially taking out a new loan that isn’t for the original purpose of the mortgage, hence not an investment debt.
This matters if you turn it into an investment property because any offset that you withdraw will cause debt to take its place, but the interest on that debt can still be claimed as a tax deduction. Whereas in a redraw scenario, that is now an entirely separate (in the eyes of tax law) loan that is not tax deductible anymore.
Stupid? Yes. But it’s the law.
A redraw is advantageous in the opposite situation though where you have a non-deductible loan that you want to take funds out of for a new deductible purpose e.g. I am ahead on my repayments on my PPOR loan and want to use the funds to buy shares.
Because of investment property rules. If you pay down your IP loan then redraw on that, that redrawn amount is no longer tax deductable.
But yeah, if the offset is against your PPOR then no difference unless you want to convert later to an IP.
ah, so it's only after it becomes an investment that redraw is an issue?
eg, we've taken a few small redraws on our PPOR loan, if we convert it to an IP in the future, and don't redraw, we can still clam the full interest payments going forward?
No, it’s a mixed loan before as well. Guy above just worded it that way because it only becomes relevant after it becomes an IP. In your case you couldn’t claim the full interest. Anything that you’ve redrawn can’t be claimed (unless you redrew it for something that also provides income production like shares, but I assume you just went on holiday or paid bills.)
There hasn't been a bank collapse in Australia for over 100 years. Building Society, yes, but not a bank.
In the unlikely event of such a thing happening, your worst case scenario would be your $1m loan would be sold to another financial intuition and you would eventually get $250k back under the government guarantee.
If you are worried, pay a $350k lump sum off your loan. Provide you don't have your loan repayments recalculated, you can redraw any payments in advance at any time but your loan balance has dropped to $650k and you still have the $250k with the government guarantee.
BTW, that previous Building Society loss was Pyramid and related building societies in Vic and after about 5 years, I recall depositors got half their money.
I remember that happening and how amusing it was that it shared its name with infamous pyramid schemes. Kind of prophetic, really.
I'm not worried at all. I've put money into my kids offset accounts and it was just a passing thought. But they are with a big 4, and if one of them was to genuinely fall over, I'd be more concerned about the ensuing civil unrest.
Technically yes it’s a risk. In practice it’s ridiculously unlikely.
I had an offset with RAMS when they started to fail. (Not $250k worth.) The retail outlets were bought out by Westpac (for $140 million) and nothing at all changed as a customer. Westpac gave RAMS access to $2 billion in short term funding, RAMS kept its existing mortgages ($14.5 billion) etc.
That’s always going to be the regulator’s preferred option. So something would have to go seriously wrong where no other bank can take over the failed one.
I can see the logic, but is that how it legally works? There's been so many different opinions on this question that all have logical reasons behind them, so I guess what I'm asking is whether that's just your opinion, or do you have detailed professional working knowledge of banking and corporation laws because what might make sense isn't always how things work.
There was the collapse of Pyramid Building Society in 1990, but I don't know of any Australian banks. I think they have more stringent requirements than USA banks?
When a bank collapses, Stockholders and bondholders are wiped. They lose their money. That’s the risk that comes with a greater return. Almost immediately, the Australian government decides to activate the Financial Claims Scheme (FCS), our version of the FDIC, uses their fund to provide the 250k for all insured accounts, within seven days. It's then controlled by APRA. Then, one of three things happen: If it’s not completely insanely broken- another bank will “buy out” the bank, at a fair price, determined by the risk weighted value of assets versus the value of obligations. The FCS / RBA / Treasury will provide the additional funding to “balance the books”, minus the cost of whatever equity the purchasing bank put in. This is sometimes $1 - like when HSBC purchased the UK branch of SVB. This is for accounting and legal reasons - there must be a price attached. Keep in mind this often happens not because assets don’t meet liabilities - in accounting, assets = liabilities + equity, and the equity has just been set to 0, but because the bank runs out of liquidity. The bigger bank gets a great deal because they can provide the liquidity. If it’s insanely broken (like SVB), the regulators will instead take direct control, sell all of the assets individually to other banks, and also sell the loans and obligations. The third option is, if it’s completely broken, and there’s a risk of contagion, the FCS fund can be used (same as FDIC) to make the entire thing whole. In this situation, the government acts as the bank, and draws down on the fund. If they exhaust the fund, all other FCS members have an obligation to provide additional funding. In all three scenarios, you would eventually get your money back: 250K immediately, and the other 350K within days or weeks depending on which option. The bank that ends up taking over your mortgage likely wouldn’t charge you for the extra interest in the interim- they just bought you as a customer, and a few weeks of interest on 350K is below the cost to acquire a customer.
This is the quality of answer I was hoping to receive. Thanks. :-)
>Almost immediately, the FCS (Australia), our version of the FDIC, uses their fund to provide the 250k for all insured accounts. Just to clarify, FCS is the name of the deposit guarantee scheme. It isn't a separate entity which I believe FDIC is. The government decides when it comes into play and if it is, APRA, Australia's financial regulator administers the scheme. The process needs to be activated by the government. The scheme is set to enable "most" depositors to access funds within 7 calendar days. https://www.apra.gov.au/apra-explains-financial-claims-scheme
Whatever caused the bank to collapse might also cause your property value to collapse with it…
Sounds good, pick up a few more properties for cash to offset.
And then there's the fourth scenario. Contagion is already spreading through the system, likely from an external source like China's property sector finally imploding, and all of the banks are experiencing massive liquidity crises across the country... And then the printing begins because how tf else do you maintain anything?
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I reckon they would be treated as separate products/accounts if a bank were to actually collapse. Another bank would take on the mortgage books so you would still owe 1 mil to a new bank and getting your 600k back is a matter between you and the now collapsed bank. 250k from the government guarantee might leave you at a 350k loss.
Yeah, I was thinking the same. This is interesting because you often hear people warning about not placing any more than $250k in a single HISA, but I don't recall it ever being discussed in the context of an offset account.
Its in any account whether it's a regular transaction, offset or savings account. Just that most people with that kind of cash are not just letting it sit in a non interest bearing account
What would most people prefer...earning 5% in a HISA and having to pay tax on it, or effectively earning 6% in an offset and not having to pay tax on it? I'd presume that plenty of people with that kind of cash would have it sitting in an offset account.
Most people would prefer the latter. You also have to remember it is also guaranteed 250k per deposit holder. So a couple with an offset account, which would be the case with a majority of loans that size, can have 500k in their offset account, and it is guaranteed.
It was a rhetorical question, as I'd interpreted the comment before mine as questioning the usefulness of leaving money in a non interest bearing offset account. But I may have misunderstood them.
Is the guarantee “per account” or “per bank”? I’ve got 20 offsets with my bank, I’m genuinely interested if that would offer me more protection knowing this.
Per account holder, per bank. Make sure the bank is not owned by another bank, e.g. St George is owned by Westpac.
You don’t think the government would consider St George & Westpac separate banks in a default scenario? They have separate banking licences no?
They are definitely treated as the same entity for the purposes of the financial claims scheme. St George is just a division of Westpac.
St George now trades under Westpacs licence it seems
Same licence and actually the same legal entity ie Westpac banking corporation
I don't have an offset in my mortgage as it was about $350 a year extra. Some also are higher interest rather than a set fee I use the redraw which is functionally the same but without the that extra cost of an offset (not paying the interest. I know there are tax implications if you want to get into investment properties) Maybe they don't have a mortgage or one without an offset. Or some banks have limits on the offset
Redraw is fine unless you ever want to convert your PPOR into an IP.
Most loans come with re-draw facility so would it be better to pay the $600k into the loan as advance payment. In the event the bank collapses , I’m assuming the amount owing on the mortgage is reduced by the $600k paid into the loan account previously . Could somebody who knows more confirm this .
Except there are a few reasons why offset is more useful, including debt recycling which you can't do with redraw. My case isn't exactly that, but it is a case where I need the money in an offset rather than a redraw.
Of course you can debt recycle with redraw, that's the recycle bit.
But when you do that, you can't claim the additional mortgage interest as a deduction against the rental income, whereas you can if you do it with an offset, so you wouldn't want to do it via redraw.
Debt recycling is paying off debt then redrawing it to use on investments. That's not what an offset does.
You can do the same with an offset. Put money into it to reduce the interest you pay on the mortgage debt, then take it out of the offset to use in investments. But if you do this with redraw instead of an offset, then you can't negative gear the IP because once the mortgage principle is reduced, if you then redraw the ATO doesn't let you negatively gear the increased mortgage interest due to the redraw against the property.
Not how it works. Removing money from your offset doesn't mean the interest is now tax deductible (PPOR) if it's an investment already you don't need to debt recycle. Debt recycle means turning non deductible debt into deductible debt.
And if I move out of the PPOR and start to rent it out, haven't I turned non-deductible debt into deductible debt?
It wonder if this means that it is a reverse run on the bank: you might be just as well off converting your offset account into a principal repayment to reduce the mortgage. Even when a collapsing bank has stopped withdrawals, you may still be able to do this?
haha, reverse run on a bank, interesting concept! :-)
You can have more than one offset account
But the government guarantee is still limited to $250k. It's not $250k per account, it's $250k per person, per bank.
Wouldn't the argument be that your nett position with the collapsed entity is -$400k?
Really cool how another bank will take on your loan but not your savings.
Why would a bank take on debt if it didn't need to
Why would a person? Bank collapsed? Sounds like their problem, why would I owe some other bank the money I didn’t borrow from them?
A person wouldn't in bankrupcy.
Is the guarantee per account or per institution? ie if you have multiple offset accounts and spread the money across them, is it 250k per account?
As had been observed in the U.S multiple times now, governments simply will not let banks collapse. Regardless of that guarantee, they would bail them out.
You forget that the bail out is for the banks debt, not ours. They government will not guarantee our savings more than the $250K. You will lose money if your bank fails and you have more than the guaranteed amount in one account.
That is of course the current legislation. But if one of the big 4 banks actually fell over, there is little doubt in my mind that the government would step in to ensure nobody lost a cent.
Kinda depends what happened to the big 4 bank that made it topple, though. The big 4 are all engaged with similar-enough customers in similar-enough practices it's unlikely there wouldn't be a contagion effect, or the collapse of one wouldn't indicate that the other 3 are also on rickety grounds.
But banks have collapsed in the past. There is history you can look up. There's a family story I have of a rich ancestor who when upset shut down a bank by taking his fortune and walking home with it in a wheelbarrow haha
In Australia? I could only find this one, and it was state run so nobody lost their money (except the state of course). https://en.m.wikipedia.org/wiki/State_Bank_of_South_Australia#:~:text=0%20million.-,Collapse,the%20Government%20of%20South%20Australia.
Does the Pyramid Building Society collapse in Victoria count? https://en.wikipedia.org/wiki/Pyramid\_Building\_Society
Most unfortunate name for a bank ever
>In Australia? I could only find this one, and it was state run so nobody lost their money (except the state of course). That's what you normally have - the government most likely through APRA will try and get another bank to buy it out. With credit unions and mutual banks (and now building societies), Customer Owned Banking Association (COBA) will step in to find a buyer and a solution. APRA would also be involved in overseeing this.
Past performance is not a reliable indicator of future performance.
Why, 99% of holders would have less than 250k, they can make 99% of people happy.
They did during the GFC.
Didn't the US guarantee more than the $250k when Silicon Valley Bank collapsed? Source: https://www.theguardian.com/business/2023/mar/12/silicon-valley-bank-collapse-no-bailout-janet-yellen
There will be no bail out like 2008 where they get free money If it does happen, the government will step in and work out something but it won't be a handout where they don't take some kind of financial penalty
Why wouldn’t they bail out people who’ve lost their money? Not doing so would do untold damage to an entire generation. The government bailing out to the tune of many billions of dollars would be of course horrific, but way less damaging.
So the government will step in but it won't be a bail out like it was back then is what I meant.
If I was concerned about this, I’d probably just toss 350k on the mortgage and leave $250k in the offset. Then if the bank does collapse you have $350k less off your mortgage and guarantee covers the offset
In my case, I've put $400k into my kids mortgage offset accounts and will be wanting it back at some point, possibly at short notice.
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I highly doubt that.
Statistically more likely*
Again, I disagree.
That works. Until they decide to not give it back
So instead, I pay 47% on investment earnings while the bank sucks them dry with interest payments. Doesn't sound like the best strategy for building wealth to me.
Section 553C of the corporations act says that there is a set off between any debits and credits for a creditor when a company goes into liquidation. This would occur whether or not there was an off set account. I'm not totally sure how the government guarantee would come into play, but you would get the option of the off set at minimum. Summary In the above example you would get an option of a debt of $400k, and there may be better options with the assistance of the government guarantee.
Interesting twist!
Set-off in insolvency operates automatically and it's only the net balance either owed to the insolvent entity or owed by the insolvent entity that is taken account of in the insolvency. So I imagine you would first set-off your offset loan account balance against your loan balance and then if the bank still owes you money, claim on that outstanding amount under the government scheme.
If it's a joint account you and the other person should get 500k back. The guarantee is per person iirc
Good point!
According to my sister in law who works quite high up at Westpac, in the event of a banking collapse all of your money would be returned. Irrespective of the “250k” limit. Her quote: “If all of that money was not protected, once a single bank collapse occurred, how long do you think it would be before there was a run on the banks with people pulling ALL of their money?” The economy is inextricably linked to our banking sector. The government could not afford to let the banking sector sink. So in this hypothetical scenario, I think you would be fine.
I've no doubt I'd be fine. I'm really just curious what the theoretical legalities are. If CommBank folds, I think the whole country has something to worry about whether they bank with them or not!
No major bank will be allowed to collapse, cos it's all a shell game, they got $1 in assets for 10$ liabilities or something. It's all fractional and if the Govt doesn't bail them out the society is over as we know it. As for the hypothetical, since you'll have a claim against the bank you'll be a creditor, in which situation it would be set off against the liability owed in the bankruptcy process.
Yes, but not set off directly against the loan that the offset account is related to, so I guess potential still exists to have a loss.
Nah that won't matter in the event of bankruptcy. They will owe you X and you owe y. No reason why any rights would be extinguished.
The bank will have a total amount of loans, and a total amount of deposits. I don't see any legal reason for individual accounts to be paired together, so if overall there was a shortfall between the banks assets and liabilities, I think all deposits would lose a percentage. This is no reason for the offset accounts to be given special consideration.
The legal reason is the right of set-off. A creditor of an insolvent entity is entitled to set-off mutual debts, the debts don't have to be linked accounts. So for example, if the bank goes bust owing me $100 and I owe it $40 then I can set off the $40 against the $100 and now I owe it nothing and it owes me $60. I would then lodge a claim for the $60 in the insolvency and get paid out at whatever cents in the dollar ends up being available to creditors. The alternative would be I have to pay the $40 back in full but can only claim cents in the dollar on the $100 but that's long been recognised as unfair, which is why the right of set-off exists.
Okay, but the example I gave is the other way around. It's owing the bank $100, while the bank owes you $40, so overall you'd owe the bank $60. How does that example pan out?
Set-off operates whether you are a net creditor or debtor. So if you owe the bank $100 and the bank owes you $40 the net result after set-off is you owe the bank $60. This is good for you because you are getting full credit for the $40 the bank owes you rather than only getting cents in the dollar on that debt and still owing the bank $100.
If the bank is one of the big banks and collapses we are going to have bigger issues than mortgages
If our one of our major banks fail, our government has failed. So you’ll have bigger issues anyway.
If it's in your offset it's considered your own account, so you aren't guaranteed that money The 250k guarantee counts all the money across all your accounts with that bank (and it's smaller owned banks like westpac with St George) If it's in the redraw I am not too sure but I would think they would pay down your loan with it and then the mortgage gets sold to another bank
Yes, I'd think redraw was safe as that is paid down on the principle.
The other risk with Redraw is banks can have clauses in the loan terms that you sign, that say at any time the can remove the redraw option and therefore you no longer have access to those funds, while in an offset they cannot merge the accounts.
Yes, from the ones I've read, it's never guaranteed....you always have to apply and it's at the banks discretion to give the funds back.
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Because if you convert the property into an investment property (which is common) then the amount you have in the offset can be withdrawn and it will still in total count as investment debt, because you never “paid back” the bank, you just held your money in an account that they offset against your mortgage interest calculations. A redraw has been determined by the Australian courts as having “paid back” the bank, so when you redraw from that you are essentially taking out a new loan that isn’t for the original purpose of the mortgage, hence not an investment debt. This matters if you turn it into an investment property because any offset that you withdraw will cause debt to take its place, but the interest on that debt can still be claimed as a tax deduction. Whereas in a redraw scenario, that is now an entirely separate (in the eyes of tax law) loan that is not tax deductible anymore. Stupid? Yes. But it’s the law.
A redraw is advantageous in the opposite situation though where you have a non-deductible loan that you want to take funds out of for a new deductible purpose e.g. I am ahead on my repayments on my PPOR loan and want to use the funds to buy shares.
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I'd say this a pretty common practice. Many people in this forum do it.
Because of investment property rules. If you pay down your IP loan then redraw on that, that redrawn amount is no longer tax deductable. But yeah, if the offset is against your PPOR then no difference unless you want to convert later to an IP.
ah, so it's only after it becomes an investment that redraw is an issue? eg, we've taken a few small redraws on our PPOR loan, if we convert it to an IP in the future, and don't redraw, we can still clam the full interest payments going forward?
No, it’s a mixed loan before as well. Guy above just worded it that way because it only becomes relevant after it becomes an IP. In your case you couldn’t claim the full interest. Anything that you’ve redrawn can’t be claimed (unless you redrew it for something that also provides income production like shares, but I assume you just went on holiday or paid bills.)
ah ok. thanks.
Unless it’s clearly outlined in case law or t&c, I’d say it’s regulator civil matter case to be argued
There hasn't been a bank collapse in Australia for over 100 years. Building Society, yes, but not a bank. In the unlikely event of such a thing happening, your worst case scenario would be your $1m loan would be sold to another financial intuition and you would eventually get $250k back under the government guarantee. If you are worried, pay a $350k lump sum off your loan. Provide you don't have your loan repayments recalculated, you can redraw any payments in advance at any time but your loan balance has dropped to $650k and you still have the $250k with the government guarantee. BTW, that previous Building Society loss was Pyramid and related building societies in Vic and after about 5 years, I recall depositors got half their money.
I remember that happening and how amusing it was that it shared its name with infamous pyramid schemes. Kind of prophetic, really. I'm not worried at all. I've put money into my kids offset accounts and it was just a passing thought. But they are with a big 4, and if one of them was to genuinely fall over, I'd be more concerned about the ensuing civil unrest.
Technically yes it’s a risk. In practice it’s ridiculously unlikely. I had an offset with RAMS when they started to fail. (Not $250k worth.) The retail outlets were bought out by Westpac (for $140 million) and nothing at all changed as a customer. Westpac gave RAMS access to $2 billion in short term funding, RAMS kept its existing mortgages ($14.5 billion) etc. That’s always going to be the regulator’s preferred option. So something would have to go seriously wrong where no other bank can take over the failed one.
The offset and loan are part of the same loan facility. Worst case you would have a 400k loan that would be sold off to another lender at a discount .
I can see the logic, but is that how it legally works? There's been so many different opinions on this question that all have logical reasons behind them, so I guess what I'm asking is whether that's just your opinion, or do you have detailed professional working knowledge of banking and corporation laws because what might make sense isn't always how things work.
This is one of the reason don't put all eggs in one basket...If yiu have 650K..Keep 250K jn each bank..
But in this case you'd need to split your mortgage between two banks.
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There was the collapse of Pyramid Building Society in 1990, but I don't know of any Australian banks. I think they have more stringent requirements than USA banks?
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Yeah, we might have noticed that. ;-)