Pension Mortgages

A pension mortgage is a type of interest-only mortgage which uses the tax-free lump sum taken from your pension scheme to pay off the amount you borrow. A personal pension is an investment which relies on stock market growth, which means that this investment plan is not guaranteed to repay the full mortgage amount at the end of its term.

However, a pension does benefit from a certain amount of tax relief, which means that for every one pound you invest in the scheme, the government may add up to forty pence extra, depending on the rate of income tax you currently pay. Nevertheless, the Government may change tax rules at any time during your mortgage term, which could reduce the overall benefit.

The pension you use to pay off your mortgage can be one to which you have already contributed, such as a personal pension or occupational pension scheme, but you may choose to take out a separate scheme on the advice of an independent financial advisor.

In many cases, you also benefit from a life cover option, which is tagged onto the pension scheme. This also qualifies for tax relief, which means that it can be a cost-effective way to obtain a life insurance policy.

The main disadvantage of a pension mortgage is that if the plan does not perform well, your retirement income could be severely reduced because a significant part of your investment is used to repay your mortgage debt. A further disadvantage is that pension schemes will only pay out once you reach fifty years old (or fifty-five from 2010), which means that if you take out a pension mortgage at the age of twenty five, you would have to take out a thirty year mortgage so that the pension sum can repay the amount borrowed. Not only would you pay more in interest charges, as it is charged each year on the amount you still owe, but taking your pension at fifty-five as opposed to sixty-five could dramatically reduce its value, which means that your retirement income could be severely reduced.

In the majority of cases, a pension mortgage is considered a relatively expensive mortgage option, but it could offer you a good deal. Ensure you seek professional advice before opting for this type of mortgage.

For more details on the UK Pension system, see Pensions.