Pension mortgage

A pension mortgage system works by taking out an interest only loan and also paying money into a personal pension or stakeholder. Once you retire you will be able to cash out your tax-free lump sum, which is used to pay off your mortgage.

The Advantages of a pension mortgage.

1. The lump sum collected at the end of the term, used to pay off the mortgage is completely tax-free.

2. There is no other mortgage deal that offers tax relief at your top rate. In addition to this, if for example you needed life cover, then you can use a term insurance policy linked to the pension plan, which means you get tax relief at the top rate on your premiums.

The Disadvantages of a pension mortgage.

1. There is no guarantee that your pension fund will grow big enough to pay off your mortgage.

2. In order to build up a tax-free sum large enough to pay off your mortgage, then it will have to be 4 times as big! Many people find that in order to do this they have to pay vast amounts into their account, which is simply too expensive.

3. You are basically relying on one plan to provide 2 very important and different needs, as a means to ensuring a retirement income, and a means of paying off your mortgage. It is not a good idea to put all your eggs in one basket in case of disaster, for instance if one plan fails, then likely is the other.

4. Many find that a pension mortgage is mainly suitable for the older generation, or those who have retired. Say you were 30 and wished to retire once you reached 60. Would you really want to be paying interest for 30 more years to come?

5. If you have joined a pension scheme at work, or have become unemployed and cannot afford any repayments, then you will not be eligible for a pension mortgage. There are restrictions on who can apply.