How The Right Mortgage Could Help You Start A Pension

Just recently pension mortgages have increased greatly in popularity. They seem to be a real godsend for those who are self employed, not eligible for pension benefits in their workplace, or own at least five percent of a company. But what exactly is a pension mortgage and what are the benefits and drawbacks to having one?

What Is A Pension Mortgage

A pension mortgage is a one where the homeowner pays money into a pension in addition to making payments on the interest of the loan. It's similar to an endowment mortgage, with the main difference being, of course, that instead of an endowment backing the mortgage a pension does.

When a person reaches retirement age, the term on the pension mortgage will expire. At this time, the person will receive a lump sum of money from their pension plan that is completely tax free. This amount should be enough to pay off the mortgage, although this is not always the case. If there is not enough in the pension plan to pay off the mortgage, the person has the option to use money from their pension fund, but this money is subject to taxing.

On the other side of the spectrum, if someone has surplus in their pension plan they have the option to either invest the extra money or to withdraw it as cash.

Why Might I Not Want A Pension Mortgage?

Although the pension mortgage may seem like a good idea, there are disadvantages to having this kind of mortgage.

One, of course, is that there is no guarantee that you will have enough money when you retire to pay off your mortgage and you will have to find other means to do so.

The lump sum that you are given must be used for the mortgage and cannot be used for anything else. This means that it's prudent to make certain that your contributions are sufficient to pay off the mortgage and still have money for your retirement.

The mortgage amount remains the same throughout the term of the loan, which can be 25 years or more.