Borrowing to buy property in your pension is back available. Last week ICS Mortgages announced that they are going to start lending again to pension funds to purchase property.
During the Celtic Tiger, purchasing properties through pensions were very popular. When the recession hit, people couldn’t keep up repayments and fell into arrears. As the loans are partially non recourse loans, the banks could only repossess the property and couldn’t come after the individual or the employer for the arrears. Afterall, it is the pension fund that owns it, not you.
Steps to purchasing property through your pension
You need to establish a self directed PRSA if self employed or a Small Self Administered Pension Scheme (SSAS) if in pensionable employment. A SSAS has to be approved by the Revenue and it can take up to 3 months to get approval.
At present, ICS only deal with ITC and Davy as trustees so you have to set up your pension with either of those companies.
At Bluewater, we work with ITC for self directed pensions, so I am able to detail their charges:
0.5% annual management charge for SSAS – minimum of €900
1.25% annual management charge for PRSA if less than €100,000. If it is up to €1m, the charge is 1% and for over €1m, it is 0.75%.
Unit trust set up fee of €450.
Legal fees of €1,984. You must also pay your own solicitor for conveyancy.
There is a liquidity requirement that you must have 10% of the net asset value plus costs in cash in your pension fund. The reason for this is property is an illiquid asset and fees and property costs have to be paid for out of the fund, so there must be ample cash available.
A property management company will manage the property on your behalf. It is against Revenue rules to manage the property yourself.
Once you have the pension structures in place, you can look for borrowing for a property
Lending criteria
Maximum mortgage term of 15 years. The minimum term is 5 years.
Maximum loan to value of 50%.
Loan from €40,000 to €500,000.
Capital & interest or interest only available
Variable rate for capital & interest of 5.45%
Variable rate for interest only of 5.59%
Legal fees of €1,845 plus outlay
Application fee of 0.5% of the loan amount
Advantages of purchasing property through your pension
No income tax is paid on the rental income
No capital gains tax is paid on the disposal of the property
You can carry the property over into retirement into an ARF (the debt must have been paid off).
You can pay company or personal contributions to pay for the property and claim tax relief on the contributions.
Disadvantages of purchasing property through your pension
Borrowing means increased investment risk. As you are borrowing 50% of the value of the property, any fall in value will in effect be doubled when gearing is taken into consideration.
Illiquid. Property is a very illiquid asset. Even when the property market is buoyant, it can take a number of months to sell a property. You also need to ensure that you have enough cash to pay your tax free lump sum at retirement.
Expensive. As you can see, there are a lot of set-up fees in getting the pension and the loan in place. It is not cheap.
While this may be beneficial to some pension holders, it will not be suitable to everyone. If you borrow to buy a property through your pension, you have to remember that you still have to pay off the loan. If there is a downturn and you cannot make payments, the property may be repossessed. The pension fund that you have accumulated may be wiped out.
Borrowing to buy a property through your pension is quite complex and a lot of work, so if you have any questions, you can contact me directly at steven@bluewaterfp.ie
