Pension Backed Mortgage

[Rico]

Looking to see is it possible to arrange interest only mortgage and set up a pension type fund to pay off the capital on main residence. Wouldnt it make sense to get the benefit of tax relief if you are paying at the higher rate. Aware of problems with endowments in the past, wondering if there are any up to date products.

 

[DerKaiser]

As far as I know most pensions providers can help you out here. You can even put it together yourself as follows:

1) Switch to an interest only mortgage
2) Increase your pension contributions
3) Pay off the capital on your mortgage at retirement with your tax free lump sum.

Example:
Say you're 40, self employed and earning 100k per year. You may be paying 17k per year into a pension (10k after tax) and 15k in mortgage repayments (10k of which is interest) .
If you move to an interest only mortgage you can now afford to put about 8k per year extra into your pension (it will only cost you 5k after tax).
At retirement you can then take 25% of your pension fund tax free to pay off the mortgage.
By directing money away from your mortgage you will ultimately pay more interest, but for every €3 you put into your pension the government chips in with €2 so this more than offsets the additional interest.
Putting away €25k a year (€15k after tax) for 25 years could easily build up a pension fund of €1.2m, with €300k tax free cash going a long way to paying off outstanding capital on you mortgage

 

[Abacus]

Der Kaiser has the technical outline correctly. However not all lenders will be keen to put a mortgage on a primrary residence on an open ended interest-only mortgage or on a pension mortgage (which can effectively be the smae thing)

Reasons - partly to do with the Family Home Proetection legislation. Judges may not look favourably on re-possesion claims on default of repayments wher the lender did not take prudent steps to ensure repayments.

In the case of open-ended interst only, this pont would be debatable.

2.

 

[Abacus]

Der Kaiser has the technical outline correctly. However not all lenders will be keen to put a mortgage on a primrary residence on an open ended interest-only mortgage or on a pension mortgage (which can effectively be the smae thing)

Reasons - partly to do with the Family Home Proetection legislation. Judges may not look favourably on re-possesion claims on default of repayments wher the lender did not take prudent steps to ensure repayments.

In the case of open-ended interst only, this pont would be debatable.

2. A pension backed mortgage is a

 

[Abacus]

.../ continued.

A pension backed mortgage is not enforceable by a lender, as under Irish Legislation it is not possible to assign pension benefits to a third party (except on court orders pursuant to seperation and divorce) Therefor the lender advances the loan on the basis that.

(a)they will get interest

 

[Abacus]

apologies to anyone who is trying to read this reply. Keyboard was causing pronblems. For anyone still with me.....

You can't assign a pension, so the lender relies on three things.

*that you will maintain your pension contributions.

*That the pension contributios will perform as expected

*That you will use a chunk of the money to pay off the loan balance at say age 60 or 65

For these reasons the pension mortgage is usually used for more commercially oriented property transactions. E.g. buy to let or more often for professionals or the directors of small limited companies to aquire properties to rent to their own businesses. In such circumsatnces good tax-breaks are generated.

In a personal pension plan, (or as a proprietory director) you can take 25% of the fund as a tax-free lump sum, and use this to clear the mortgage, so therefore, in theory, you need to have a pension fund of 4 x loan amount. However lenders may want a safety margin and look for a target fund of say 5x loan amount.

If you go the ARF route you can have more cash. e.g. fund 1,000,000.
(a) Tax-free cash 250,000, (b) directed to AMRF 63,500. (c)This leaves a further 686,500 that can be drawn down but which suffers tax @ 41% and levies at 2% yielding another €391,305 or a total of 641,000 in cash.

In some cases taking all of the tax breaks into account, and the love of bricks an mortar, borrowers will make decisions to go this route and have a rentable property at the end rather than a traditional pension.

In other cases the intention all along will have been to sell the property and pocket the capital gains, with rent having covered the interest only payments in the interim. In such circumstances the pension fund remains intact, and was simply a "comfort" to the lender and the borrower and a tax-effiecient comfort at that.

All in all, many advisers will recommend the pension backed mortgage for small (and not-so-small ) business oweners and self-employed. Many advisers would shy away from trying to arrange it on a family home.

For further coverage you can readup in "Tax-magic" by Alan Moore

(are we allowed to recommend relevant books on this forum ?)