# Allow people to borrow the deposit on their home from their pension fund



## Brendan Burgess (11 Sep 2017)

An excerpt from my pre-Budget submission on behalf of the Irish Taxpayer
*

Allow people to take out a mortgage from their own pension fund to get on the housing ladder.* 

*Allow people to borrow from their own pension fund to repay existing mortgages on their family homes. *

People are finding it very hard to save up the deposit to buy a house.  Why not let them borrow their own money from their own pension fund?  Irish borrowers are paying 3.5% mortgage interest to the banks. Why don’t they pay this to their own pension fund instead?

This would have huge advantages

·  More people could provide their own housing needs rather than relying on the state.

·  It would make the mortgage lenders more secure as the Loan to Values would be lower.

·  It would cut the cost of mortgages significantly. Instead of paying 3.5% to swell the profits of the lenders, they would be swelling the profits of their own pension fund.

·  It would encourage young people in particular, to contribute to their pension funds as they would see them as a means of getting on the housing ladder.

This would have to be phased in over a few years so as not to disrupt the housing market. For example, it could be limited initially to first time buyers of new houses. It could also be limited to €300,000 or to half of the amount in the pension fund.


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## Purple (11 Sep 2017)

Given that there is a housing shortage this will just drive up prices; the same people will end up buying the same houses, they will just pay a whole lot more for them. 
Demand currently out strips supply so anything that increases the money supply chasing that supply is a bad thing.


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## ant dee (11 Sep 2017)

It could be a long term plan though wouldn't it? 
So that at least the youths entering the workforce now can start saving in their pension and know that in 10 years time they can use some of that money towards their house.


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## Purple (11 Sep 2017)

ant dee said:


> It could be a long term plan though wouldn't it?
> So that at least the youths entering the workforce now can start saving in their pension and know that in 10 years time they can use some of that money towards their house.


I'd rather see it available to people within 10-15 years of retirement who don't own their own homes.


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## ant dee (11 Sep 2017)

The problem remains though, how to keep something like that from soaring the house prices even higher...


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## Purple (11 Sep 2017)

ant dee said:


> The problem remains though, how to keep something like that from soaring the house prices even higher...


It does indeed. The housing shortage is yet another example of how we have the wrong discussion in this country. It should be about why the construction costs of houses is so high here. Why are Irish builders so inefficient and downright bad at their job?


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## cremeegg (11 Sep 2017)

Purple said:


> Given that there is a housing shortage this will just drive up prices; the same people will end up buying the same houses, they will just pay a whole lot more for them.
> Demand currently out strips supply so anything that increases the money supply chasing that supply is a bad thing.



Basic economics would suggest that increased demand should prompt increased supply.

Also there are signs that the lack of supply over recent years has been due in part to the achievable price of housing not matching the costs.


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## planck (11 Sep 2017)

*Allow people to take out a mortgage from their own pension fund to get on the housing ladder.*

Leaving aside for a moment any likely impact of this idea on the Irish housing situation, for information, the approach of using your pension fund to assist in purchasing property is a well established practice in Switzerland - a variation on that is pledging the capital i.e your retirement savings merely serve as collateral (that obviously requires that the pensions fund itself is clearly solvent - another topic)

In Switzerland, generally you have to come up with 30% of the purchase price and at least 10% of the property's value must be financed using equity that does not come out of your occupational pension scheme. A search will throw up plenty of articles - I don't yet meet the criteria to post a link but this is the search I did
_home purchase using pension funds Switzerland_


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## Gordon Gekko (11 Sep 2017)

I like this idea for selfish reasons but with my fairness hat on, surely it would just give more firepower to those who don't need it?

The net result being greater inequality and a steeper hill to climb for those with no home and no pension.


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## Brendan Burgess (12 Sep 2017)

People can borrow money anyway from the banks. They pay 3.5% for the privilege. 

It's completely wrong to have a system in place where the tax incentives encourage people to put money on deposit through their pension fund at 0.5% to lend back out to themselves at 3.5%.  It fattens up the banking and investment management industry. 

So the principle that people should cut their borrowings and provide for their own accommodation is clear. 

It would not be a question of giving more firepower. It would, in fact,  allow many people to get on the housing ladder, who currently don't have the firepower to get on the housing ladder. 

As I have also pointed out, it would wake up young people to the value of pensions. If you tell a 25 year old that she can save for the deposit on her house through contributing to a pension, she is far more likely to contribute to that pension. 

It would also get rid of the dilemma facing people, and discussed at length here on askboutmoney, "Should I contribute to a pension or pay down my mortgage?"

The problem as I pointed out in my first post on the topic is the impact that any measure like this would have on the housing market. Especially in a dysfunctional housing market as we have at present. 

It would have to be gradually introduced so as not to distort the housing market. 

For example, it could be announced today that from 2020, it will come into effect. This would mean that people would start contributing to their pensions now. The problem with this is the SSIA effect. It could be that a wall of money might hit the house market in 2020. 

It could be that the 10% deposit from their own money is retained.  But that they could borrow whatever is in their pension fund to reduce their mortgage. 

So to buy a house for €200k 



The borrower could pay any additional savings into their pension fund and use them to reduce the normal mortgage. 

They would reach a situation at, say, age 45 

Value of pension fund: €180k (+ interest) 
Mortgage zero 

House value, say, €300k 
Mortgage due to pension fund: €180k 


*Again, I would stress that this should be how it would eventually work in a normal market 
*
It would have to be gradually brought in. 
For example, it might be limited to a maximum of €100k initially. 

Brendan


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## el chapucero (20 Sep 2017)

Hello Brendan,
It would help us a lot  if you could convince them to :
"*Allow people to borrow from their own pension fund to repay existing mortgages on their family homes. "*


but the pension withdrawal would need to be tax free. I thought Michael Noonan was going to do this in a budget  few years ago but what he offered was no good.

I am over 50 with 30 + years of full time work. If I lost my job I could take a tax free lump sum from the pension and clear a large portion of the mortgage.
The pension is with New Ireland and is going nowhere [ I have 50% in cash as the pension funds have been battered a few times I am in unsure employment. If the job goes I can take the cash and clear some mortgage. This 50% is a type of security that I have and is based on how much I could take from the pension based on past income ]. In early 2016 I was advised to put the invested 50% of the pension into bonds as they were supposed to give low but sure growth. Then after The US election these suffered.  
If I got this 50% tax free lump sum for mortgage payment on our family home I could continue chipping away at the remainder of the mortgage and maybe plan a bit better for retirement. At the moment we have to pay >50% of my net salary in monthly mortgage and mortgage life insurance payments. We have a 2006 SVR mortgage.With the present arrangement we will not have the mortgage finished until I am 64+.
I expect that I will have to work until I am about 72. 
When we took out the mortgage we were both working and I thought I could make extra payments and clear it  early - little did I know what was around the corner. Mu biggest fear now is that the interest rates will rise and we will be fleeced for the last years of the mortgage. At this stage I don't really care if I lose the job as I will be able to get at the pension, clear some mortgage and try my had at some other job to keep going.
Also aside from this having some type of cap on family home mortgage rates would prevent lenders from raising these so high that we would be forced out.


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## Brendan Burgess (20 Sep 2017)

Hi El C

It's clear that there should be some integration between a person's pension fund and their mortgage.  

I am not sure about allowing you withdraw a lump tax-free. I am not rejecting the suggestion, I am just not sure about it. 

But if you were allowed to borrow from the pension fund to replace the mortgage, it would go a long way to solving the problem for you.

You would stop paying the 3.5% or whatever you are paying
Your pension fund would get the benefit of a much better return on its investments 

The costs in your pension fund should be lower 
It would be easier to make progress on this proposal than advocating some new tax-break. 

Who are your TDs?  Bring this idea to their attention. Write to the Minister for Finance. 

Brendan


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## Duke of Marmalade (20 Sep 2017)

This proposal amounts to little more than upfront tax relief for house purchase, hardly what we currently need.

I agree that a situation where the pension fund is earning .5% on deposit whilst the individual is paying 3.5% on a mortgage is to be avoided.

For a young person this is avoided by either not taking out a pension fund in the first place (which I argue elsewhere) but if she really is persuaded by the pension industry to prioritise pension funding over housing provision, for heaven sake don't invest long term on deposit.

For an older person approaching retirement placing part of the pension fund on deposit might make some sense.  She should be allowed to make premature withdrawals to pay down a mortgage, but with the necessary adjustment to the tax breaks she has enjoyed.

In short we should not be using the tax system to subsidise house purchase.  In equity something similar would need to be in place for renters.


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## cremeegg (20 Sep 2017)

el chapucero said:


> Mu biggest fear now is that the interest rates will rise and we will be fleeced for the last years of the mortgage.



I think that if you were to use a mortgage calculator to see what your monthly repayments would rise to if rates on your SVR were to rise by 2 or even 3 per cent, you might be pleasantly surprised.


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## Delboy (20 Sep 2017)

This topic is now about to be discussed on the Pat Kenny show on Newstalk


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## Firefly (20 Sep 2017)

Brendan Burgess said:


> But if you were allowed to borrow from the pension fund to replace the mortgage, it would go a long way to solving the problem for you.
> 
> You would stop paying the 3.5% or whatever you are paying
> Your pension fund would get the benefit of a much better return on its investments
> ...



Hi Brendan,

How would the bank manage LTV in this case? Say the pension fund invests in something "bad" and the fund is all but wiped out. No the bank has no collateral so to speak.

Another thing to note is that the whole purpose of a pension is to have a cashflow for when you retire. Dipping in to the fund to buy a house means less cash when you retire.


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## Brendan Burgess (20 Sep 2017)

Firefly said:


> How would the bank manage LTV in this case? Say the pension fund invests in something "bad" and the fund is all but wiped out. No the bank has no collateral so to speak.



The bank's approach to LTV doesn't change in any way.
Say I have a house worth €400k and a mortgage with AIB of €300k - that is 75% LTV
Now if my pension fund lends me €100k to refinance AIB's mortgage down to €200k, the LTV from AIB's point of view is now 50%
If I invest the balance of my pension fund in pork bellies and they become worthless, AIB is not affected at all.





Firefly said:


> Another thing to note is that the whole purpose of a pension is to have a cashflow for when you retire. Dipping in to the fund to buy a house means less cash when you retire.



The beauty of my proposal is that it does not affect this in the slightest.
Say I have a pension fund today of €300k invested in equities and bonds. Tomorrow after I refinance €100k of the loan to AIB, I will still have a pension fund of €300k. 

If you allow tax-relief for early withdrawal to pay down a mortgage, you would be reducing the value of the pension fund and probably favouring buyers over renters, as suggested by the Duke.

Brendan


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## Brendan Burgess (20 Sep 2017)

Delboy said:


> This topic is now about to be discussed on the Pat Kenny show on Newstalk



Hi Delboy

Who was on and what did they say?

I had not seen it discussed anywhere else except on Askaboutmoney and in my Sunday Independent article. 

Brendan


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## Duke of Marmalade (20 Sep 2017)

So taken to extreme, the pension fund at retirement consists of nothing more than a loan to the individual secured on his home.  When taxable deductions are then taken from the ARF funded by drawdowns on the loan, where does the money for the tax come from?


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## Delboy (20 Sep 2017)

Brendan Burgess said:


> Hi Delboy
> 
> Who was on and what did they say?


Got a phone call just as it was starting and missed it I'm afraid. It was Pat and an Eoin McGee of Prosperous Planning?
The listen back facility on Newstalk is easy to use so half way through part 2 of today's show
[broken link removed]


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## Brendan Burgess (20 Sep 2017)

Delboy said:


> It was Pat and an Eoin McGee of Prosperous Planning?



OK, it was  just a general piece about using your pension to invest in property through funds and REITs.

They did not discuss this proposal.

The only interesting (to me) bit was that in the UK, a person can buy their business premises through their pension fund, but that is not allowed in Ireland.

Brendan


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## Brendan Burgess (20 Sep 2017)

Duke of Marmalade said:


> So taken to extreme, the pension fund at retirement consists of nothing more than a loan to the individual secured on his home.  When taxable deductions are then taken from the ARF funded by drawdowns on the loan, where does the money for the tax come from?



Taken to extreme, if there were no limits and if someone had no other savings, then this would be the outcome.

But appropriate limits would be introduced. For example, it could be limited to €100k or 20% of your fund whichever is the lower.

However, the most likely outcome for most people would be as follows:

1) Contribute heavily to their pension fund up to their late 20s.
2) Borrow the deposit from the fund to buy their first house
    Borrow 80% from a mortgage lender in the ordinary way.
3) Continue contributing to the pension fund in their 30s and use the fund to replace the mortgage.
4) At age 40-45 - they will have a pension fund of €300k with one asset a mortgage of €300k on a home worth hopefully more than that. 
5) Stop contributing to the pension fund and start repaying the mortgage in the normal way
6) On retirement, the fund will have as assets €300k in equities and a loan of €100k.
They can pay the 25% tax free - €100k which could (must?) be used to clear the mortgage.
So the ARF would have €300k in equities.

Brendan


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## Thirsty (20 Sep 2017)

It's a long time since I was there, but if memory serves me right Singapore had a similar scheme in place.  There were large blocks of government designed / funded apartment blocks, known as Utility apartments, they were all the same size & standard, they could be purchased using a deposit from your personal fund, it wasn't unlimited though.


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## Duke of Marmalade (20 Sep 2017)

Brendan Burgess said:


> Taken to extreme, if there were no limits and if someone had no other savings, then this would be the outcome.
> 
> But appropriate limits would be introduced. For example, it could be limited to €100k or 20% of your fund whichever is the lower.
> 
> ...


I suppose so.  It remains that this is a very direct tax incentive to save for €100k deposit on a house.  Admittedly under these limits you would also have saved an additional €400k in your pension fund.  This seems a tad unrealistic for the average starter out.


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