Which mortgage to choose?

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Which mortgage to choose?

Some life companies make loans available from their own resources that is, from policyholders' funds -to borrowers who have a pension plan with that company. In times of a mortgage famine, this could be a useful extra string to your bow, though the interest rate may be slightly higher.

The loan will work in exactly the same way as a building society loan; and you must not expect the requirements to be any less stringent, simply because it is the life company which is lending you the money.

Many life companies, as well as having agreements with building societies, also have special arrangements with banks who will lend money on the strength of a pension plan. The most active banks in this field at the time of writing were the Bank of Scotland, the Royal Bank of Scotland, Forward Trust (part of the Midland Bank group) and Barclays.

Life companies who get a request for a loan are likely to try to place it with their 'friendly' bank or building society first -and if it is turned down owing to a shortage of funds on the bank or building society's part will see if they can accommodate it themselves.

Pensions and life assurance

A pension plan in itself does not contain any life assurance. Indeed, the most basic pension plan policy does not even provide for the return of the premiums you have paid in should you die before retirement.

It is obviously essential that you also take out some form of life assurance to cover this risk -and most lenders (whether it's a building society, a bank or the life company itself) will insist on it before they lend money on this basis.

Again, the pension plan holder is favoured in this matter. Whereas ordinary life assurance policies attract tax relief at the rate of 15%, if you take out a 'package deal' under your pension plan, you can benefit from full tax relief on the life assurance premiums -that is, a minimum of 30%. A maximum of 5% of your 'net relevant earnings' may be devoted to life assurance -and this 5% is part of, not extra to, the total allowance of17.5% allowed for pension premiums. For most people, this amount is going to be far in excess of what they are ever likely to need.

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Pensions as a source of funds

As with endowment policies, the lender has to make assumptions as to how fast the pension plan will grow. In the case of 'with-profits' pension plans, most societies will accept between 0.8 and 1 of the current reversionary bonus, but will ignore the terminal bonus. With unit-linked policies (which societies are, for some reason, more willing to accept than they are unit-linked endowment policies) they assume a rate of growth of between 0.075 and 0.1 a year.

The whole concept of pension mortgages is only two or three years old; building societies are still really at the stage of dipping their toes into the water here, and many are still deciding on a case-by-case basis rather than having general guidelines applicable to all. With perseverance, however, you should . . .... see: Pensions as a source of funds

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