Repayment Options
Pension mortgages
| Advantages
| Disadvantages
Disadvantages Of Pension Mortgages
Because of the need to accumulate four times the value
of your home in the pension plan, this type of repayment
vehicle will require a significantly higher monthly outlay
than the other types of investment vehicle used with interest-only
mortgages. There are limits on the size of the contribution
that you can make into your pension, which can make reaching
your required amount difficult, especially if you are buying
a very high-value property. Other people may not be able
to afford to contribute as much as their limit and also
may struggle to reach the required fund value.
Not everyone qualifies for a personal pension, so this
route is not available to all - only the self-employed or
anyone not in a company pension scheme can normally use
them. A problem arises if you change status and are no longer
eligible for a personal pension. You would have to switch
to a different repayment vehicle and may be penalised financially
for this.
The benefits of your pension plan cannot be taken until
retirement, usually until you are at least 50 years of age.
That means you are realistically stuck with this type of
mortgage until your retirement, making it the repayment
method that requires the most long-term viewpoint.
If you don't wish to retire at the end of your mortgage
term, then you will end up paying more interest on the loan
than with other repayment vehicles. This is likely to be
the case if you start the pension mortgage more than twenty-five
years before your planned retirement date. You should also
remember that you will get a lower pension in retirement
if all or part of your lump sum is used to pay of your mortgage.
As with an ISA mortgage, tax-free investments are great
in theory, but since pensions are equity-linked it's not
so great when the value of the investment is actually falling,
as may have been the case over the early years of this century.
Pensions are complicated to understand, with all sorts
of rules and regulations governing contributions. Given
that many people are pretty lapse in ensuring their pension
arrangements are in order at the right time in their life,
it is no surprise that few people are mentally or financially
ready to combine their mortgage with a pension, instead
preferring more simplistic methods of clearing the mortgage
debt.
