How Pension Mortgages work
A pension mortgage works on the same principle as an endowment mortgage. Rather than paying back a combination of capital and interest over the term of the loan, with an endowment mortgage you only pay back interest on the borrowings every year. At the same time you take out a life assurance investment policy (an endowment) into which you make regular payments. The aim is that at the end of the mortgage term, your endowment will have grown sufficiently to pay off your capital.
You are entitled to normal mortgage interest tax relief on your interest payments with an endowment mortgage. But, there are no additional tax advantages and consequently endowments have become less popular.
That’s where a pension mortgage is different. The mechanics of the mortgage are broadly the same – you pay interest on the amount you borrow, but rather than taking out an endowment policy, you take out a pension plan. Your regular pension contributions receive tax relief and grow tax free until you retire. When you retire you simply use part of the fund to pay off the mortgage.