People using the new pension freedoms to drawdown money prior to retirement and pay off their mortgage early could find it more costly in the long run, according to national advisory firm LEBC Group.
However, many are considering doing so because their lender has warned them that their existing mortgage cannot be extended beyond their state retirement age.
Kay Ingram, divisional director at LEBC, explained that if a lender is pushing for early repayments there could be other options such as seeking a new lender or renegotiation of the existing loan.
“While many lenders are writing to borrowers asking how they can repay the loan, they may be willing to extend it or change the basis of the loan, especially if you can show you can afford it,” she noted, adding that while some have fixed policies such as no mortgages beyond age 70, others are more flexible and an independent mortgage adviser will be able to shop around the whole market.
Ms Ingram warned that taking more than just the 25 per cent tax free cash sum means that anything over this will be taxed at the individual’s highest marginal rate of income tax, therefore necessitating spending a lot of the pension pot in tax to clear a much smaller debt.
Peter Gettins, product manager at London and Country Mortgages, told FTAdviser that dabbling with your pension is not something to be done lightly – especially when it comes to going beyond the 25 per cent tax-free allowance.
“That said, there may be perfectly valid reasons to put the pension to use: some will have taken mortgages with the express intention of using their pension lump sum to repay some or all of the loan.
“There’ll be others who find themselves able to pay off their loan early and – with the provisos rightly highlighted – that may be a perfectly sensible thing to do.”
Mr Gettins also noted that Ms Ingram’s argument appeared to be directed at those who have taken an interest-only loan and find their repayment strategy is inadequate for whatever reason.
“I don’t think there are any reliable figures on the scale of this issue, but it certainly exists and for the individuals involved can be a cause of great concern.
“The first thing to say is that lenders have an obligation to act sensitively and constructively – no-one should feel bounced into sacrificing their pension by their lender and I doubt any lender will push for early repayment, though they may very well want to know how it’ll be repaid when it falls due.”
Finally, he added that there’s a range of providers who could lend up to age 75 and a few go beyond that.
“Any new lender would need to see that the mortgage repayments are affordable on the pension income. It’s also likely this would have to be at least partly on a capital and interest basis which, combined with a relatively short term could push the cost up considerably.”
peter.walker@ft.com
