Mortgage Clinic: The concept of the £10 mortgage

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The Independent Online

'I'm in the fortunate position of being able to pay off my mortgage early. However, my building society has suggested that I keep a nominal £10 balance on the account, on which it will not charge interest. It would keep the deeds for me, and give me the option of drawing down a loan in future. What are the pros and cons of this idea?' Mike Epstein, via email

Diagnosis here at the mortgage clinic normally constitutes a painstaking trawl through all the upsides and downsides of a particular financial ill, in order to establish a finely balanced remedy. This query, though, has yielded the closest I've seen to a one-sided answer.

No doubt about it, keeping open a mortgage account could save you cash, offer you free security for valuable legal documents and even supply you with cheap finance at a later date.

First, your lender's suggestion that you keep a tiny slice of debt open may well spare you punitive early repayment charges (ERCs), levied if you clear the entire debt in one go, says Melanie Bien, of mortgage broker Savills Private Finance.

"If this is the case, then keeping that £10 in place may potentially save you thousands of pounds in ERCs," she advises.

Now, you might well wonder why a lender would forgo such a payment: the answer is all about your future potential as a profitable customer.

"By remaining a mortgage account holder with the lender, you'll be able to draw down future funds for whatever reason – and depending on the rate, it could suit you to choose them over a bank or rival lender," says David Hollingworth at broker London & Country.

As a former trusted customer, he adds, you would be likely to get the funds very speedily compared to other channels where you'd have to wait for loan approval. That's not all.

"By storing your mortgage deeds for free, they'll be saving you the £50 a year charged by a solicitor or bank," adds Ray Bougler at broker John Charcol.

So are there really no downsides? Well, there is one very minor quibble.

If you don't close down the mortgage account, your credit rating will still show it as an "outstanding account" while no monthly payments are being made – and may cause some questions by lenders during future credit checks.

To this end, says Peter Brooker at Experian credit agency, "ask the building society to mark the account as 'dormant' – and then get them to confirm it to you in writing".

It's a good idea, he adds, to write to the credit reference agencies and ask them to insert an electronic "flag" on your account explaining why you only have £10 in there. Don't worry: this is normal practice and simply eradicates any chance of misunderstanding by other lenders.

It's a very small price to pay for what could – in the long term – turn out to be a very good deal for you.

Send us your questions and you could receive £50 to spend at Amazon

Foxed by jargon? Confused by all the options? Email a question to mortgageclinic@independent.co.uk. We will not reveal your identity, and we cannot give specific advice. If your question is printed, you'll receive a £50 voucher from Amazon.co.uk, so you can kit out your home with anything from a lawnmower to an espresso machine. www.amazon.co.uk/homeandgarden

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