A pension mortgage is an interest only mortgage with an additional investment plan in the form of a personal pension. A personal pension is a stockmarket based investment that benefits from tax relief and tax free growth.

A pension pays a tax free lump sum and a monthly taxed income on retirement. The lump sum is normally used to pay off the mortgage.

Advantages

• Pension contributions benefit from up to 40% tax relief for higher rate tax payers.

Disadvantages

• Your debt remains constant throughout the mortgage period.



• You have no guarantee that you will have sufficient funds to pay off the mortgage at the end of the repayment period, as the pension fund could perform below expectations. (By monitoring your pension fund's performance, you could make additional contributions during the repayment period if you felt it was under performing.)



• The lump sum cannot be used for other purposes. You therefore need to ensure that your level of pension contributions are sufficient enough to maintain your required standard of living during retirement.



• The mortgage period may be longer than 25 years, depending on your age. You will still need to meet interest rate payments throughout this period.



• The tax situation regarding pensions is open to unforseable changes.