The Case for Pension Mortgages
After a decidedly rocky patch, the Irish love affair with property has been rekindled with lending more available and demand outstripping supply in Dublin and other major urban centres. New and niche lenders have entered the market, encouraging existing lenders to improve their interest rates and offerings to remain competitive.
Thankfully, strict lending rules imposed by the Central Bank should limit the potential for a lending bubble. According to the Central Bank, more than 50% of house purchases are currently being made by cash buyers. This statistic and the low level of new housing stock currently being developed is combining to drive prices upwards. Current low interest rates and generous rental yields are making it more attractive for people, whose savings might otherwise remain on deposit, to purchase investment properties.Some of these “cash buyers” are individuals using their pension funds for the purpose. Within your pension the rental income and the capital appreciation of the property accumulate tax free.
There is now a mortgage facility available to allow pension funds leverage their value to buy Irish residential investment property that otherwise would be unaffordable. Not all pensions will be able to access this product. Typically, a small self-administered scheme, or SSAS, must be set up, and the funds transferred into it, before any application can be made to the lender. The process of setting up the appropriate pension scheme for this purpose can take up to 2 months, so it is important to prepare accordingly.
Your pension may borrow up to 50% of the value of the property. When other ancillary costs are factored in, the fund value should really be more than 60% of the purchase price and if the mortgage is on a capital and interest basis, there requirement could be even higher. All charges associated with the borrowing will come out of the fund.
It is important to remember that strict Revenue rules exist when purchasing property through your pension. The purchase and subsequent rental of the property must be on an “arms-length” basis, in other words, you may not purchase the property from, sell or rent to anyone connected to you or your family. Unlike investment funds, liquidity is limited by your/your funds ability to find a ready market for the property at a time of your choosing. If direct property makes up a significant proportion of your fund, you may have difficulty in accessing your tax-free lump sum at retirement.
Proper pensions advice is required to ensure that leveraging your pension for the purchase of investment property is suitable for your circumstances and future needs. Poor or cheap advice in this area may prove to be a very expensive mistake that you will carry with you into your retirement and perhaps beyond.
MoneyCoach’s pension experts are available on 1890 4280343