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In Australia and the United Kingdom, it is common for home loans to come with an offset account. The balance of the account is “offset” against the loan when calculating interest, so the borrower saves more money than they would earn if the cash was held in an ordinary bank account, while retaining the ability to withdraw the cash on demand.

If the home loan is provided by a non-bank lender, the offset account is “not covered by the [Australian] government’s financial claims scheme, which guarantees traditional offset accounts up to $250,000 if bank lenders fail.”

What would actually happen if you had a $500,000 home loan from a non-bank lender, with $250,000 in your offset account, and the lender became insolvent?

Could the receivers demand repayment of the full $500,000, leaving the borrower exposed to a potential $250,000 loss with the lender’s other unsecured creditors?

Or would equity prevent the receivers from recovering more than the net balance of $250,000, effectively granting the borrower priority over the unsecured creditors?

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An offset account is just a deposit account

This is true of both bank and non-bank lenders.

When you signed your loan agreement there was a lot of stuff about how you had to pay it back or give the lender your first born child etc. When you opened your offset account you got a flimsy piece of paper saying they would give you your money back if you asked for it and they felt like it. More or less.

Your loan agreement is a valuable asset in the hands of the liquidator; they will sell it along with all the other assets. With the money they realise they will pay (simplified):

  1. The liquidator’s fee and other costs of the liquidation
  2. The secured creditors
  3. The employees
  4. The unsecured creditors (that’s where your offset account sits)
  5. The shareholders

In that order.

The money usually runs out in step 3, particularly for businesses with few tangible assets. You know, like finance companies.

So, yes, in the circumstances you describe, your debt continues but your deposits get 1-2c in the dollar. Of course, if you actually deposited that money into the loan (assuming such prepayment is allowed for the particular loan) then that would reduce your debt.

The difference between bank and non-bank lenders is that the Australian Government guarantees the first $250,000 in deposit accounts in banks.

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    So Australia does not recognize a right of setoff if you loan and the associated offset account are with the same firm? Does the mortgage lender not have a security interest in the offset account? Setoff would have been the norm at common law.
    – ohwilleke
    Commented Sep 29, 2022 at 14:28

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