A
uk pension mortgage combines an interest-only
loan and a pension plan, which is the repayment vehicle for
the capital portion of the debt (in other words, the amount
you originally borrowed).
In terms of the dangers, it has a lot in common with an Isa
mortgage and has a couple more all of its own.
Just like an Isa mortgage
You need a hefty dose of
discipline
To build a big enough fund to clear your capital debt, you will need to keep up
the payments regardless of any other calls
on your cash.
(Although, unlike an Isa, you can't plunder a pension plan
in the early years you're simply not allowed to, because
the law states that it must stay invested at least until you're
50.)
It's a risky investment
Pension plans invest in shares (also known as equities) through
the stock market.
This means the value can fall just as quickly as it can rise.
A pension plan is a long-term commitment though, so it's likely
to increase in value considerably over the entire investment
term but there is no guarantee of this.
Just like with an equity Isa, you could end up with less than
you put in, leaving you unable to pay off you debt.
As for the extra dangers mentioned above
When we say long-term
Because your plan legally has to stay invested until you're
50 (from 2010 this rises to 55), you won't be able
to access the cash to clear your debt until then.
So if you start your mortgage now aged, say, 25, you will
have to keep it running for 30 years instead
of the usual 25.
That means paying an extra five years interest and that's
an awful lot of money.
For someone borrowing £100,000, that could add up to £30,000 or
more.
But if you cash in your plan at just 55, it will probably be worth
much less than if you left it running until 65, eating into your
retirement income.
Talking of your retirement
income
Whatever age you are when you access your plan, you'll be using
up a huge chunk of the cash you would otherwise have had to see
you through retirement.
And it's a very expensive way
to pay a mortgage
As the law stands, you can take up to 25 per cent of your pension
pot as a tax-free sum when your cash it in but you can't have
any more than that.
(The rest goes to buy
an annuity, unless you opt for drawdown which you don't need
to know about here.)
To clear that £100,000 mortgage, you would need to build up a
pension pot of at least £400,000.
To achieve that, someone starting a plan at age 20 might need
to invest around £300 a month, while someone starting at 30 might
need to pay in around £500.
Frankly, you'd be much better off with a repayment
mortgage it's risk-free and far cheaper.
Read
enough? Just want a quote? To get
your best mortgage quote quickly and easily we can
put you in contact with a recommended mortgage adviser. It's free,
completely confidential and there's no obligation at all. Simply
fill out the form below
