CONSUMERS with debts and savings at the same bank or building society, including those with popular offset mortgages, face confusion over what level of protection they would have.

The fact that 100% of savers’ deposits up to £35,000 are fully protected in the event of the failure of a bank or building society is now well known – although not entirely true. It all depends on whether you have debts with the same firm, on whether that firm is a bank or building society – and it could also depend on the sort of debt involved.

The Financial Services Compensation Scheme (FSCS) limit – shortly to increase to £50,000 – applies to all firms which have a separate registration with the Financial Services Authority.

In the case of the banks, the situation is clear. Whatever the nature of the debts – whether credit-card balances, overdrafts, personal loans or a mortgage – the total debit and credit balances an individual holds will be set off against each other before determining whether he or she is eligible for compensation, and if so, for how much.

For instance, if you have a £1,000 overdraft and savings of £35,000 with a bank which fails, the £1,000 debt will be set off first against your savings, so your debt is wiped out but you only have £34,000 in savings – and this is what you would be covered for under the FSCS, rather than the full £35,000. You are, in effect, no worse off than you were before, although you have £1,000 less in ready cash in exchange for your debt being repaid.

Where the debt is much bigger – a mortgage, for instance – it will have a different impact. While many people spread their savings round, borrowers with an offset mortgage usually keep most of their savings with the same firm – as savings help to reduce the interest payable on your mortgage.

Suppose you have £100,000 savings and a £200,000 mortgage with a bank that fails. In this scenario, if your offset mortgage is with a bank, your savings will be set off against the loan before any calculation is made as to whether you qualify for help from the FSCS. And in the above case, where the debt is bigger than the savings, you would get no compensation for your lost savings at all. This is not such bad news as it might seem at first – in fact, it could be good news. After setting off savings against debts, you end up owing just £100,000: you are, in other words, no worse off than before.

Admittedly, you no longer have any cash, but with luck you would now have enough free equity in your home to be able to remortgage for a higher sum if you needed to raise cash. And compare this with the situation of someone who has £100,000 savings, but no debts, with the same failed bank. They will pick up £35,000 from the FSCS – but suffer an overall loss of £65,000.

Building societies are different, and have varying terms and conditions. Take Nationwide, for example. Its rules do not allow savings to be set off against any debts – such as a mortgage, loan or credit-card debt – unless the borrower is in default on that debt. The only exception is overdrafts, where Nationwide’s rules allow them to be set off whether or not the individual is in default.

If Nationwide were to fail, the liquidator or administrator would, says the society, have to follow Nationwide’s rules. In theory, therefore, someone who has both large savings and a mortgage with the society could stand to lose more, overall, than someone in a similar situation with a bank. Nationwide does not have an offset mortgage product.

Yorkshire building society, on the other hand, says its rules allow for savings to be set off against debts, while Skipton’s rules resemble Nationwide’s.

So where does this leave worried savers? Arguably, those who are most worried – those with big savings balances which they are reluctant to split up or move elsewhere due to offset mortgages – have the least cause to be.

In most cases, according to the FSCS, and whether the offset mortgage is with a bank or building society, the setting-off rule applies. As long as your savings are lower than your mortgage, you are, in effect, 100% protected up to your savings limit. Anyone else who has savings and debts with a single bank will be in the same position: the one will be set off against the other and only your net loss will be considered for compensation.

However, if you are with a building society, this setting-off rule will not necessarily apply – it will depend on the terms and conditions set by individual societies and it may also depend on which products you have with them.