A pension mortgage is a very tax efficient way of purchasing a property that suits the self-employed, partners or directors who own more than 5% of their company.
Quite simply it involves two financial transactions, an interest only loan on the property and a pension plan. The idea being that the fund built up in the pension plan will meet the capital aspect of the loan at the end of its term.
As some of the pension plan will be subject to tax on retirement and growth is dependent on prevailing market conditions, most banks will ask for the build-up of a fund equal to twice the capital amount. This is to ensure adequate funds are available to pay back the mortgage at the end of the term, thus protecting the customer.
Also, as there is an interest only loan on the property a level term life cover policy will be requested by most financial institutions.
The keys advantages to a pension mortgage are tax related:
1) Maximisation of tax relief on interest payments
2) Tax relief on all contributions
3) Tax free growth of the fund
4) Tax free lump sum upon retirement
For a graphic illustration of the tax reliefs available through a Pension Mortgage click on the “Contact Us” section on the right and we will forward a spreadsheet to you.
