Securing Property Purchase against Pension

regency_man

Many years ago now I was talking to the father of one of my university friends about how they afforded to buy a large farm in Oxfordshire and take early retirement.  The man in question was around 55 and worked in finance in London.  He made a comment that I didn't really understand at the time but am interested to understand now. 

He said that they purchased the farm using the value of his pension fund as security.  I just nodded and smiled as I didn't want to look naive, but the way he said it implied that they wouldn't normally have been able to afford to do this without this particular way of financing it (indeed they continued to keep their house in London as a second home). 

What did he mean by this?  Having done a little research I thought what he probably meant was that he took out an interest only mortgage with the value of his pension fund as the security?  But then I thought about it again, why would he need the pension as security when the farm itself would be the security?  Or was the security on the pension simply to ensure he could afford the repayments and/or redeem the mortgage at the end of the term?

Is this a normal thing available to the public, if so, what are such products called?

Thanks!

silvercar

You used to be able to do this. The rules were fairly lax on interest only mortgages, you just had to state how you would fund the repayment when the time came at the end of the term. In those times, endowments were popular, but when they went out of favour, pension mortgages were just another way of saying interest only with the pension lump sum being the intended way of clearing the mortgage.

regency_man

silvercar said:

You used to be able to do this. The rules were fairly lax on interest only mortgages, you just had to state how you would fund the repayment when the time came at the end of the term. In those times, endowments were popular, but when they went out of favour, pension mortgages were just another way of saying interest only with the pension lump sum being the intended way of clearing the mortgage.

When you say 'used to be able to' do you mean it is no longer possible to use a future pension lump sum/fund value as the stated means of paying off the mortgage?  Or is it still possible but there would be a higher level of diligence/proof required?

dunstonh

He said that they purchased the farm using the value of his pension fund as security.

You cannot use pension funds as a means of security.     So, its more likely he was phrasing it that way using his own words.

What did he mean by this?  Having done a little research I thought what he probably meant was that he took out an interest only mortgage with the value of his pension fund as the security? 

Yes, part from the fact the pension would not be security.  It would effectively replace the traditional products that could be used as security though.  e.g. an endowment policy could be held as security.

An endowment policy held as security would see the policy assigned to the lender.  This would prevent the policy from being surrendered and it would allow the lender to prevent the regular contributions from stopping (back in the day, direct debit mandates for endowments would be marked with an "S" to indicate they were used as security for a debt and ensure they were not bounced due to lack of funds or cancelled by the payer.      All this is obsolete nowadays.

 But then I thought about it again, why would he need the pension as security when the farm itself would be the security? 

Security would cover two things here
1 - The farm is security for the debt if he fails to repay the debt
2 - adding security to the endowment policy would prevent the borrower for cancelling the repayment method.

As you cannot mark a pension as security, it would be notional.  i.e. I intend to use my tax free cash on the pension to pay the mortgage.

Is this a normal thing available to the public, if so, what are such products called?

An interest-only mortgage and a personal pension or SIPP.   However, it is a bad idea for 99% of the public from a suitability point of view.

When you say 'used to be able to' do you mean it is no longer possible to use a future pension lump sum/fund value as the stated means of paying off the mortgage?  Or is it still possible but there would be a higher level of diligence/proof required?

its still possible but many lenders won't allow it.     You may see it more with commercial lending, such as farms where lending decisions are bespoke.

silvercar

At some point, with the furore of endowment policies failing to achieve their forecasts, lenders started relaxing their hold on endowments. Instead they would remind people that they had interest only mortgages and it was their own responsibility to ensure they had the funds to clear the mortgage at the end of the term. So at that point you could have an interest only mortgage secured on the property, but with no other security held for repaying the loan. With the endowments failing to achieve, people did start looking at pension lump sums as a way of clearing their mortgage. For a while (late 80s/ early 90s) some lenders would allow you an interest only mortgage without formal security.
Then the move to responsible lending made interest only mortgages much harder to obtain and the presence or not of pensions became less of an issue.

I have an interest only mortgage because the original mortgage was portable and it happened to have a lifetime interest rate deal, so I've still got it. At one point the lender started to write asking for details of the plans I have in place to eventually clear it. But it is only a tick box exercise. 

dimbo61

You can still get an Interest only mortgage to buy a BTL rental property provide you put down a 25/35% deposit.
Some lenders will offer Interest Only mortgages to high net worth customers with say a 50% deposit but your talking about customers earning £100,000+ a year with savings and investments