If you’re thinking about a new mortgage or a change of mortgage – have you stopped to consider a pension mortgage at all?
Twenty years or so, ago, you heard a lot about pensions mortgages, but they seem to have fallen out of favour in recent years. This is understandable; after all, a pension should be there to provide you with an income in your dotage rather than paying the principal off your mortgage loan.
But it’s that kind of snap judgement that has caused the decline of the pension mortgage and it may not be a fair assessment.
First the basics; a pension mortgage is an interest-only type of mortgage whereby the additional investment plan is in the form of your personal pension.
The personal pension is most usually a stock market-based investment, and it also benefits from both tax relief and tax-free growth. The idea is that the pension pays a tax-free lump sum and a monthly taxable income when you retire. At this stage, the lump sum would usually be used to pay off your mortgage.
As pension contributions can benefit from up to 40% tax relief for higher rate taxpayers, a pension mortgage can be a great idea. Also, it may help force you to pay more into our pension than you otherwise would. And in reality, you’ll probably find other ways to pay off your mortgage premium at the end of the period if you’re a regular saver-investor.
So it may be possible to view the extra pension contributions (which are highly tax-efficient of course) as a kind of bonus payment if you’re sensible and shrewd along the way.
And as people are living longer than ever before, this may be a good thing.
On the downside, there are no absolute guarantees that you’ll have enough to pay off the mortgage at the end if things go badly, but the tax relief helps and you can ramp up your payments when your income allows.
Written by David, a keen financial blogger, who writes about topics ranging from UK Payday loans to insolvency issues.