When you are saving money to put into your pension, it is important to review it on a regular basis. This way you will be able to see how it is being invested. As you grow older, you may even decide to change the way you invest your money so that there will be less risk as you get closer to retirement age. With that said, should you consider investing in pension mortgages?
Mortgage Products
Over the past few decades, competition has been responsible for many of the newer mortgage products that are on the market. However, the majority of people still prefer repayment and endowment mortgages. In fact, all other mortgage loans in the industry accounted for only around 17 percent of the new construction society mortgages.
The mortgage products that are not as popular are:
- Mortgages that are repaid by unit trust investments
- Mortgages that are paid by lump sum contributions to pension funds or personal equity plans
- Loans that are half repayment and half endowment
- Mortgages that are in foreign currencies
Unit Trust Mortgages
These types of mortgages were never really popular or well-known, and even though they claimed to improve investment values quickly, and allowed borrowers to pay off their mortgages early, it was not too long before they were proven to be just as vulnerable when the stock markets fell.
The values of these unit trusts dropped and so did the shares. Borrowers were faced with the possibility of a shortfall when they were ready to redeem.
Pension And PEP Mortgages
These types of mortgages are viewed as more stable than unit trust mortgages. Both pension and PEP mortgages are tax-efficient. Investors do not have to take out a large amount, they only need to take out an interest-only mortgage. With this type of mortgage, they only pay the interest and they also get traditional tax relief as well.
The investors are also eligible to purchase personal equity plans or savings plans that have annual lump sums. In addition, the capital and the income are both accumulated and are tax-free until it is time the mortgage is up for redemption.
The contributions that are made tax-free and the repayment of the mortgage comes from the retirement lump sum. As a result, a balance remains that is used for the pension.
However, there is a downside to these types of mortgage products. They are not able to provide the same type of discipline that a repayment or endowment mortgage can, and they also rely heavily on the borrower to keep a realistic investment amount in the pension or PEP plan.
Who Is Not A Good Candidate For A Pension Mortgage?
These types of pension mortgages are not a good fit for everyone. However, those who are self-employed and have enough disposable income often find that this type of investment helps them save thousands of pounds.
This type of mortgage works similarly to the types of mortgages that are backed by personal equity plans or endowment policies. The customer borrows the money, but they only pay back the interest to the lender. Once the term has ended, the customer does not pay off the capital. Instead, the mortgage loan is paid via a lump sum that the lender receives from the person’s individual pension fund once he or she enters retirement.
On the other hand, homebuyers who are considering pension mortgages have to be dedicated to staying self-employed. Or, they must be dedicated to having a personal pension scheme.
If there is any chance that the homebuyer may gain employment through an employer that has a competitive pension scheme, it may be the wrong time to commit to using a personal plan to pay off a mortgage.
What Are The Benefits Of A Pension Mortgage?
One of the benefits of pension mortgages is that they have a high tax-efficiency level. The lump-sum monies are tax-free, and this means that investors who are in a slightly higher income bracket put only pounds 60 for every pounds 100 that is invested.
The repayment mechanism for pension mortgages can also be transferred whenever the investor decides to remortgage or move. This differs from repayment mortgages in that they have to be repaid if the investor moves.
What Are The Disadvantages?
One of the biggest drawbacks of these types of investments is that the required level for contributions need to cover the capital of the loan. The maximum lump sum that is allowed on a personal pension fund for retirement is only 25 percent of the complete fund.
The remainder of the money has to be used to buy a retirement income plan or an annuity. This means that if the value of the mortgage is pounds 150,000 the total fund in the pension must be at least pounds 600,000.
Even if the fund is able to reach the required size by retirement, the investor will still need to make a decision. Will he or she really commit the majority or even all of their tax-free pension to repay a mortgage loan instead of earning pension during their retirement?
There are some mortgage lenders who will advance only 80 percent of the total lump sum because of that very reason. Those who are taking out mortgages should also understand that the benefits are only taken from the pension and the capital that is paid off whilst they are between the ages of 50 and 75. This is one reason why term assurance policies are typically required when a person chooses a pension mortgage.
Industry experts suggest that those who are interested in pension-backed mortgages make sure that their pensions are generously funded. This will help to compensate for the money that they will have to withdraw. This is the money that they are using to repay a mortgage loan that would go towards financially supporting them during retirement.
Investors can choose to purchase a second-hand endowment policy to help fund the mortgage repayment. It is best to speak with an experienced policy trader for advice on the best way to proceed with this option.