Pensions

Pension Mortgages

A pension mortgage is a tax efficient way of buying a property that suits the self-employed, partners or directors who own more than 5% of their company. It involves building up a fund through a pension plan and using that to pay off your mortgage. The Difference between a Pension Mortgage and the familiar Repayment or (annuity) Mortgage.

Repayment Mortgage

The borrower takes out a mortgage over a certain term (usually 10 to 25 years). Each month, the borrower repays a certain amount to the lender. This is split by the lender in three ways.

• To pay of the interest on the mortgage
• To pay a portion of the original loan amount (the capital)
• To pay for insurance costs such as, life cover to pay off the loan should the borrower die.

Initially therefore, most of the payments go towards paying of the interest. However, because some of the capital is also being repaid, it means that the outstanding mortgage amount reduces over time. Because the outstanding mortgage amount reduces, the interest payments reduce as well, and the total repayments (which stay the same) pay increasing amounts of the capital, until the full balance is paid off at the end of the term.

Pension Mortgage

Pension mortgages work on a different principle. The borrower pays three separate payments each month.

• They pay the interest on the loan to the lender.
• Secondly, they pay a contribution into a pension plan. The customer gets full tax relief on this contribution.
• Thirdly, they pay insurance costs such as payments into a life cover plan.

By repaying just the interest to the lender, instead of repaying any of the capital, the outstanding balance of the loan stays constant. However, alongside the loan, the pension policy grows as more payments are made. Because some of the pension fund may be subject to tax in retirement, most Institutions require the pension fund to build up to twice the loan amount. This ensures that the fund should be more than enough to repay the mortgage at the end of the term. The end of the term must coincide with the borrower being 60 or more, as most people cannot access their pension fund until this time.

The Advantages of a Pension Mortgage

• Tax Relief on contributions
• Tax free growth on the fund
• Tax free lump sum

The disadvantages of a Pension Mortgage

• Retirement Income
• Investment Risk
• Restrictions on Term
• Early redemption on mortgage
• Tax Changes

The Conditions of applying for a Pension Mortgage

The rules will differ from lender to lender and are there to ensure that the fund built up is sufficient to repay the mortgage at the end of the term.