House Doctor: 'Can our bank take money from our savings to cover a mortgage shortfall?'

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The Independent Online

Question: We've recently taken out a mortgage with Santander after being offered a decent 3.85 per cent rate.

However, a colleague has somewhat alarmingly suggested that – because we also have savings with the same bank – if we struggled with our mortgage, the bank could actually withdraw money from our savings to cover the monthly repayment? Is this really true – could our home loan erode our savings cash?"

K Souther, Tooting

Answer: Technically, the answer is yes; but in all likelihood, it's no. Your colleague has raised a controversial and oddly low-profile issue known as setting off.

In a nutshell, it gives most banks the right to dip into cash held in a current account or savings account and use it to pay off any other debts that you already hold with them. This is a remarkable right in itself but pales next to its actual application: it doesn't even have to tell you if it decides to act on it.

"The basic position is that a firm has a right to look at a customer's overall position and to combine the accounts held by that customer," says a spokesman for the Financial Ombudsman Service.

So if you'd missed two or three mortgage repayments and were in danger of serious default, your bank would be able to cover your mortgage payment by simply taking the money from your savings without telling you. In principle, it means anyone repaying a mortgage and harbouring savings in the same bank is exposed to this risk.

But in practice, it tends to apply to those in dire financial trouble and struggling to meet repayments. Of course, you should be talking to your lender if it ever gets tha bad but it will always maintain its right to take action if it sees fit.

Unfortunately, the fallout from the recession has seen an increase in the number of households hit by setting off. Citizens Advice says it has witnessed a 25 per cent rise in enquiries from the public between 2007 and 2009 on the matter.

However, in your case there is a very simple solution: remove the risk at a stroke by moving your savings elsewhere. Given that you've recently remortgaged to a very competitive rate, there's no point in switching your loan but you should be able to easily find a decent savings rate at a rival bank.

A final word of warning, though: make sure you don't pick an Alliance & Leicester account. It's also part of the Santander group so it could, technically, still grab your savings cash if it needed or wanted to.

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