Pension backed Mortgages

Nowadays people understand the importance of ensuring their retirement will be comfortable and worry-free. This is often achieved through a secure and suitable pension plan.

However, a pension plan can also be used as a tax-efficient means of investing in property

What is a pension mortgage?

A Pension Mortgage is a mortgage which takes advantage of the tax relief available for pensions while also maximising the tax relief available for offsetting rental income against interest payments on the principal borrowed for the property.

How does a pension mortgage work?

Imagine you are interested in buying a property. Perhaps you are a company director considering the purchase of a commercial premises for your business. Step one, you would approach a bank or building society to arrange a loan. But instead of arranging a capital and interest loan, you would agree with the lender to only repay the interest on the mortgage loan every year i.e. an interest only loan.

At the same time you would make regular payments into a pension plan. At retirement you would use your accumulated pension fund to pay off the mortgage i.e. a tax efficient pension contribution is essentially being used to repay the principal borrowed.

Who should consider a pension mortgage?

If you are self-employed or a company director and you would like to purchase a commercial property or an investment property and maximise your current tax relief, then you should consider a Pension Mortgage.

You may qualify for a pension mortgage if you meet the following criteria:

• You are considering borrowing money to purchase a property.
• You have unused Pension Contribution relief.
• You are within 30 years of retiring.

Why should you consider a pension mortgage?

The 1999 and 2000 Finance Act provides the self employed and company directors with the following benefits:

• The limits on Personal Pension Contribution tax relief have been significantly increased.
• Company Directors have very significant Company Pension funding allowances for their benefit.
• The self-employed and those company directors with at least a 5% shareholding are now entitled to take 25% of their accumulated pension tax free. The remainder can, subject to restrictions be taken as cash, and taxed at the marginal rate of tax and PRSI.
• Tax relief on mortgage interest, commercial or residential, is maximised as no capital repayments are made during the loan term.
• Secondly, you get the advantage of full tax deduction and tax free investment growth on pension premiums which are used to fund the capital repayment. If you consider property owned by you as your ideal pension vehicle, then you are channeling the valuable tax reliefs available on pension funding into the purchase of your own property in lieu of traditional pension benefits.

If this makes sense to you and you would like to see a cost illustration comparison between a pension mortgage and a standard capital and annuity mortgage please contact me below.