Pension Mortgages
Pension mortgages are a type of loan where you pay for the principal at the time of your retirement using your pension fund. Pension mortgages are interest only loans. Your monthly payments cover only the interest. This basically means a more manageable monthly payment and a readily available source of fund for the payment of the principal. Sounds like an attractive deal, doesn’t it? Well, read on.
Pension mortgages are indeed lucrative. Especially if you take into account the fact that the government actually covers a portion of the payment you make for the principal (though not directly). You see, 22 percent of your pension fund comes from government contribution. Simple mathematics will tell you that you are by essence paying only 78 percent of your loan’s principal. Now that’s lucrative. And oh, did I mention the fact that you are actually paying for your pension plan tax free. Pension mortgages are even more lucrative for high rate taxpayers as the government covers up to 40 percent of their pension funds. This means that they will be paying for only 60 percent of the principal tax free.
Many people are tempted to dive into pension mortgages. It works much like putting off repayments until later. Something people are very good at. But why, the advantage of lower monthly payments is indeed very appealing. However, sacrificing the future for the convenience of the present is not always a good idea. Through pension mortgages, you are losing the very essence of your pension plan. Let me remind you of the purpose of your pension plan—to take care of you when you grow old, when you no longer have the means to work for your earnings that will cover your day to day life. Remember that growing old can be costly. You have to shell out money for medical expenses and there will be no income coming in to compensate for such expenses. Now what happens after you have spent most, if not all, of your pension fund to pay for your mortgage principal? Yes, pension mortgages are indeed lucrative. At least not until you include the long term benefits into the equation.
Talking about long term benefits leads me to my next point. Your pension is not set at a fixed amount as it is very dependent on the stock market. You know how dynamic the stock market can get. So what is the guarantee that your pension plan will be able to cover the principal? Keep in mind that you have a valuable asset at stake, most likely your very own home. Getting pension mortgages basically means facing the risk of carrying hardships at old age, the last thing you need at a time when you have lost our youth; when you have lost the ability to work for your means. You don’t want to face the challenges of old age without a home and without a pension.
More so, what if you face unemployment and are unable to sustain payment for your pension plan? Or what if you die early? What happens to your home? You’re lucky if you have an assurance policy that will take care of your mortgage repayments.
Pension mortgages offer a good deal; but only if you take the proper precautions.
