Pension Mortgages

How they work These work in a similar way to endowment mortgages, but instead of linking your mortgage to an insurance policy, you link it to a pension plan instead. Your monthly payments comprise just interest. At the same time, you make contributions to a pension plan. At the retirement date under the plan, you take part of the proceeds as a tax-free lump sum which you then use to pay off your mortgage. Pension plans are a very efficient way of saving because your contributions to the pension plan qualify for full income tax relief and the invested contributions grow tax-free.

Points to note If you have dependants, you'll need to take out a mortgage protection policy to pay off the mortgage in the event of your dying before retirement. Paying off your mortgage should not be your primary reason for taking out the pension plan - if the taxman suspects that it is, the tax benefits might be withdrawn. There are a few schemes linking an employer's pension scheme to a mortgage, but most schemes use personal pension plans. Pension mortgages are even more inflexible than endowment mortgages because you can't cash them in before retirement.

Verdict Pension mortgages can be useful for higher rate taxpayers but, for others, the monthly payments tend to be higher than for repayment or low-cost endowment mortgages. Make sure that paying off your mortgage won't leave you short of money in retirement.


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Endowment Mortgages

How they work You don't pay off any of the loan until the end of the mortgage term. Your monthly payments are made up solely of interest. In addition, you pay premiums for an investment-type life insurance policy which will mature at the end of the mortgage term and be used to pay off the loan.

By far the most common mortgage of this type is the `low-cost endowment' mortgage. Low cost' means that, in order to keep premiums down, the insurance company guarantees to pay only a certain amount when the policy matures, but on top of this there will be bonuses added. It's hoped that the guaranteed... see: Endowment Mortgages


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