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You Are Here: Home > Personal Finance > Mortgages > Different styles > Pension Mortgage
Pension Mortgage

What are they - How they work - Pros & Cons

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A pension mortgage operates in a similar fashion to an endowment mortgage -

  • An interest only mortgage is taken out
  • Part of the monthly payment goes towards paying the interest and part gets paid into a pension policy
  • The fact that a pension is used makes them somewhat more tax-efficient
The correct role of a pension is to provide an income not repay a mortgage

This is the main problem I have with Pension mortgages. A pension is designed to pay an income when retired and is not there to help repay a mortgage loan from 20 years ago.

You must therefore think hard about whether it makes sense to use all or a sizeable portion of your pension to pay off your loan. And as most people's pensions are seriously underfunded, ie there won't be enough money to pay them a proper income, a pension mortgage won't be suitable.

How interest is charged
You'll have the choice of different interest rates, for example -
  • Fixed for a certain period of time, say 1 - 5 years
  • Variable, usually the lender's SVR which is usually the most expensive rate they charge
  • Discounted - look for these deals where the lender will offer say a 1% discount for a 1-2 years etc
  • More on Mortgage interest rates
Positives

  • Tax-efficient - money that gets paid into a pension is net but the government offers a tax-break which bumps the amount up to the gross level. Plus, when retired 25% of a pension pot can be withdrawn tax-free

  • Early repayment of the mortgage - It's unlikely but still possible for the investments held within a pension to perform so well that the mortgage loan can be paid off early

Negatives


  • Lenders and advisers banned from advertising Pension mortgages - Not exactly a vote of confidence!

  • The pension plan underperforms - if so it won't be able to fully pay off the original loan

  • Uses retirement money that's designed to fund your retirement - Unless you pay at least 20% of your monthly salary into your pension it's unlikely to have enough to repay your mortgage and provide an income for life

Buying tactics, tips and tricks
Want the right mortgage at the best price? Then start by downloading our free mortgage guide and follow the 4 easy steps.
LearnMoney.co.uk comment :
The fact that lenders have been banned from advertising pension mortgages means most people should forget they ever heard the phrase. Instead try to look at mortgages which are far simpler to understand and run.
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