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A row of houses in Bristol, England.  Photo: Matt Cardi / Getty Images

A row of houses in Bristol, England. Photo: Matt Cardi / Getty Images

A creditable mortgage is when you have a mortgage and savings with the same lender in “linked accounts.” Your savings are deducted from the mortgage you owe and you only pay interest on the difference. For example, if you have a £ 200,000 mortgage and £ 20,000 savings, you only pay interest on £ 180,000.

How does a credit mortgage work?

While your savings reduce the amount of interest you pay, it’s important to remember that they are not actually paying off the mortgage, but are just sitting next to it. If you are increasing your savings, you have a choice: either reduce your monthly mortgage payments, or keep the monthly payment the same but shorten the mortgage term. The more money you deposit into your savings account, the more money you save as interest. On the contrary, if you withdraw your savings, that money will no longer offset your mortgage, so your payments will increase.

You do not receive any interest on your savings in this linked account; however, one of the biggest benefits of a creditable mortgage is its incredible flexibility. You will have easy access to your savings if you need them, so they are great if you are planning a home renovation or saving money for a new car. “Offsetting is a bit like a mortgage overpayment, except that, unlike overpayments, offsets are very easy to reuse if needed,” explains Phil Livesley, senior mortgage advisor at MB Associates. As with a regular mortgage, you can choose between a fixed, tracked, or variable interest rate and choose between repayment and interest-only products.

Read more: Green mortgage

How to get a credit mortgage

Although there are fewer options than in the conventional mortgage market, many major banks and building societies offer compensatory mortgages at competitive interest rates. You can contact the provider directly or use the services of a reputable mortgage broker to find the best deal. Use mortgage credit calculator to compare different rates and how the change in the amount of savings corresponds to what you pay each month or mortgage term. The process for creating a creditable mortgage should be similar to the process for a regular mortgage, except that you need to make sure that your savings are also transferred to a linked account. You will then be able to manage your money online by logging into your account. “Make sure you are set up so that you can easily transfer funds back and forth as needed. If you find it difficult to transfer funds to your credit account, you are less likely to do so, ”warns Leavesley.

Is a creditable mortgage right for me?

Firstly, there is no point in getting a credit-grade mortgage if you have no savings. As a consequence, they have traditionally been popular with those who have to save money for a specific reason, such as the self-employed saving money for taxes and VAT, landlords receiving rents, and those receiving bonuses or uneven income. Taxpayers at the higher and surcharge rates have also ditched them as they are a tax-efficient way to make the most of your savings. However, this is changing and they are becoming more popular.

“A common misconception is that credit-free mortgages are only for those with significant savings,” says Phil Leavesley. “But the reality is that anyone who has a reasonable savings or has a surplus between their income and spending each month will benefit from compensation.” This is especially true at a time when interest rates are so low.

A creditable mortgage is also a great way for parents to take their children up the corporate ladder and offers an easier alternative than becoming a surety. You can gift your child with cash to pay off the mortgage, and if he does not default, you will have access to it later.

See: How much money do I need to buy a house?

Read more: Are Housing Lotteries a Scam?

Possible pitfalls

While there are many advantages to getting a creditable mortgage, there are also disadvantages. Chief among them is that interest rates are slightly higher than traditional mortgages, which may outweigh the benefits of offsetting. Since your savings do not bear interest, they will also lose their purchasing power due to inflation and will decrease over time. If you don’t plan on accessing your savings, it might make sense to take out a regular mortgage and invest your savings in a long-term high interest rate bond.

It is also worth knowing that there are a limited number of creditable mortgages, and they may have limitations, for example, they cannot be used for properties with extensions. “The smaller market for lenders means that it will be more difficult to find a lender to provide a loan if there are some specific difficulties, such as non-standard types of property,” adds Phil Leavesley.

In addition, there may be rules for your savings and some lenders require you to maintain a minimum balance in your linked savings account.

Whether a creditable mortgage is right for you will depend on your specific circumstances, but if you’re looking for flexibility when it comes to your mortgage and savings, they offer a reasonable option.

See: What does lower stamp duty mean for buyers and home prices?

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