Lenders’ right to offset clauses — explained

Borrowing from your bank or credit union can get you lower rates and speed up the application process. But most borrowers don’t know that these same financial institutions can seize money from your accounts if you miss a payment. Luckily, there are restrictions on what types of funds it can seize — and easy ways to avoid signing a contract with a right to offset clause.

What’s a right to offset clause?

A right to offset clause means a bank or credit union can take money from your accounts held at that same institution to cover missed loan repayments. It’s also known as a right to set off (or right of set-off) clause.

It’s a clause in a loan contract, but only if you currently have a deposit account at that same bank or credit union — like a chequing or savings account. Generally, lenders include a right to offset clause in contracts when they think there’s a risk you’ll default on the loan.

How does it work?

If your loan becomes delinquent — which may happen around 30 days after missing a payment (policies may vary between institutions) — a bank or credit union withdraws the amount you owe from another account that it holds. Typically, it doesn’t have to give any notice or get your permission.

Legal limits to right to offset clauses

In Canada, there aren’t many limits to lenders’ right to offset. However, the following rules apply:

• To be enforceable, the right to offset must be present in the contract to which both parties agree.
• The law is not perfectly clear on whether the right to offset can be enforced when a borrower is insolvent and doesn’t have enough money to cover all of his or her debts. However, there is some indication that courts may make exceptions to the right to offset in certain cases.

If you find yourself behind on a loan payment from your bank or credit union, speak to a lawyer near you to find out more about how the right to offset applies to your circumstances. Check out the Government of Canada website to read more about how the right of offset works.

How can it affect me?

A right to offset can make a bad financial situation worse. If you have a financial emergency and can’t afford your monthly bills, the right to offset makes sure that your loan gets paid off no matter what.

This means you might not have money to cover the basics, like gas, utilities, rent or groceries. In the most extreme cases, you could end up having to take out an expensive short-term loan just to get by. This can trigger a cycle of debt, especially if you need extra money each month.

How do I avoid a right to offset?

There are a few ways to avoid a right to offset:

• Don’t borrow from your bank. Setoff clauses only apply to accounts in the same financial institution. If you borrow outside of your bank or credit union, it isn’t a risk.
• Review your contract. You still might be safe if there’s no right to offset or setoff clause in your loan contract. Ask about it before you apply, and read everything thoroughly before you sign your loan documents.
• Switch bank accounts. Set up a new bank account with another institution after taking out your loan to protect those funds.
• Consolidate. Already have a loan with a right to offset clause? You can get out of it by paying it off with a loan from another provider. This also gives you the chance to consolidate your debt for a longer term to lower your monthly cost. Learn more about the best debt consolidation loans.
• Reach out before you default. Talk to your lender as soon as you think you might miss a payment. It might be willing to change your payment due date or extend your term to lower your cost.

What can I do if a lender withdrew funds from my account?

Take these steps if you find your lender took money from your bank account to cover your loan payment:

1. Make sure it’s legal. Check with a legal professional if you’re insolvent or owe debt to multiple lenders and can’t pay it all. Make sure your lender isn’t withdrawing funds when it’s not allowed.
2. Contact your bank or credit union. Explain your financial situation and see if you can come to a new agreement that makes your repayments easier to handle in the short term.
3. Ask for a refund. If your lender took funds it wasn’t supposed to withdraw, reach out to customer service and ask about getting a refund.

Bottom line

Banks and credit unions usually only use the right to offset clause as a last resort. But it can set you up to fall into even more debt when you’re already struggling with repayments. Find out more about how loans work — and compare lenders that aren’t your bank — by reading our guide to personal loans.

Frequently asked questions

• What's an offset bank account?

  An offset bank account is a bank account that’s linked to your loan. Your lender considers those funds as going toward your loan repayments — so you don’t have to pay interest on that part of the balance. For example, if you had a $50,000 loan with a $10,000 offset account, you’d only pay interest on a $40,000 balance. It’s most common with mortgages (offset mortgages) and not very common with other types of personal loans.

• Can my pension be garnished?

  If you deposit pension funds into a bank account with a bank you owe money to, the right to offset give the bank the right to take those funds and apply it to your debt. There is no limit to the amount that can be taken from your account.

• Is offset the same as garnishment?

  It’s similar, but not quite the same. Offset only applies to loans you have with a lender that holds a deposit account in your name. Garnishment is when a lender, usually the government, can take funds from any bank account — including wages, tax returns and government benefits — if you default on a loan.