Repayment Options
Pension mortgages | Advantages
| Disadvantages
Introduction To Pension Mortgages
If you don't belong to a company pension scheme or are
self-employed, you can use a personal pension plan as a
tax-efficient way to save the cash lump sum necessary to
repay an interest-only mortgage whilst planning for your
retirement at the same time.
Not that many people are even aware that know that you
can tie your mortgage to your pension. Lenders are encouraged
not to advertise this type of mortgage because the government
doesn't particularly want people to use their retirement
fund to pay off their mortgage. There is no doubt that only
a minority of people will find that pension mortgages are
a suitable choice of product. Then again for some people,
such as a financially sophisticated self-employed higher
rate taxpayer, they can be ideal choice.
As with all the other types of interest-only mortgage,
interest is paid to the lender on the whole of the loan
for the entire term of the mortgage. This choice of repayment
vehicle combines your mortgage interest payments with payments
into your personal pension fund. In itself, this feature
of pension mortgages rules many people from having them,
as not everyone is eligible for a personal pension scheme.
Company pension schemes are not normally used, though they
sometimes can be in special circumstances if permitted by
the lender.
Your payments go into your pension fund, which then grows
over time. You will have full control over your choice of
pension product provider. However, your bank or building
society will expect the insurer to set predicted growth
levels at a conservative level to help ensure that there
is enough in the fund to pay off your loan at retirement.
The pension plan is designed to mature on your retirement.
The loan term must end between the ages of 50 and 75 unless
the borrower is in an industry where the Inland Revenue
permits earlier retirement.
The pension also needs to provide you with an income during
retirement, so only twenty five percent of the total pension
fund can be taken as a lump sum. This lump sum is used to
pay off your mortgage while the remainder provides you with
a pension income. This means that you need to accumulate
four times the value of your home loan in your pension fund
in order to pay off your mortgage. This may be difficult,
especially with a high value property.
You should consider getting a separate life insurance
policy in case you pass away before the pension matures.
With this type of mortgage, level term assurance for the
value of the loan is normally used.
