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Can I use my pension to repay my mortgage?

In April 2014 the government introduced pension freedoms allowing people to access their savings in one – many people could use this cash to repay the mortgage.

Over the next 10 years, a lot of interest only mortgages will be coming to the end of their term and borrowers need to think about how to repay the mortgage.

Interest only mortgages mean that during the term of the mortgage, you only make monthly payments of the interest on the money you've borrowed.

You don't pay back any of the money that you've actually borrowed as you would with a capital repayment mortgage.

This makes the monthly payments less but it means that at the end of the term of the mortgage you still owe what you first borrowed. And you have to find a way to pay it back.

This sort of loan has worked well for many people.  Mortgage Image

In a generally rising housing market, it allowed them perhaps to borrow more and benefit from house prices rising on a more expensive house.

But, at the end of the term, there are three basic choices for repaying an interest only mortgage: 

i) Pay off the amount borrowed
ii) Get another mortgage; or
iii) Downsize

(Of course it is quite possible to do some mixture of the three options)

Pay off

When people originally took the interest only loan, they will have had to set out the way in which they expected to pay it off at the end – the repayment strategy. For example, it may have been by way of a long term incentive plan at work, an endowment policy or by selling some asset, like a buy-to-let flat. If this plan has come off, or they have built up their savings over the years, then they can pay off the loan.

Another mortgage
The borrower may now be in a position to get a repayment mortgage and so pay off the loan over the term of a new mortgage, if that is affordable for them. They may be able to get a new interest only loan, if they can demonstrate that they will have a way of paying it off at the end of that term.

Or the borrower can choose to downsize, using the extra equity built up in their property to buy a smaller property either without a mortgage at all or a smaller one.


For the over-55s, there is another way of potentially paying off their interest only mortgage at the end of its term, or perhaps even early (though this may attract an early repayment charge).

They could choose to use their pension pot to repay the mortgage balance

Whilst this may seem attractive at first glance, it should only be done after the most careful consideration – and it’s a good idea to take financial advice from an independent financial adviser.
Realising your pension pot will have significant tax consequences at the time that you do it, as the money will be treated as income, and you will be foregoing the income that you would have had and may need during your retirement.

Whatever you do, do think through all the consequences and get independent financial advice from an adviser who can help you with both your retirement planning needs and provide mortgage advice.

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By Mark Bogard


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