A UK Pension Mortgage combines an interest-only loan and a pension plan, which is the repayment vehicle for the capital portion of the debt (in other words, the amount you originally borrowed).

In terms of the dangers, it has a lot in common with an Isa mortgage and has a couple more all of its own.

Just like an Isa mortgage

You Need a Hefty Dose of Discipline

To build a big enough fund to clear your capital debt, you will need to keep up the payments regardless of any other calls on your cash.

(Although, unlike an Isa, you can’t plunder a pension plan in the early years you’re simply not allowed to, because the law states that it must stay invested at least until you’re 50.)

It’s a Risky Investment

Pension plans invest in shares (also known as equities) through the stock market.

This means the value can fall just as quickly as it can rise.

A pension plan is a long-term commitment though, so it’s likely to increase in value considerably over the entire investment term but there is no guarantee of this.

Just like with an equity Isa, you could end up with less than you put in, leaving you unable to pay off you debt.

As for the extra dangers mentioned above

When we say Long-Term

Because your plan legally has to stay invested until you’re 50 (from 2010 this rises to 55), you won’t be able to access the cash to clear your debt until then.

So if you start your mortgage now aged, say, 25, you will have to keep it running for 30 years instead of the usual 25.

That means paying an extra five years interest and that’s an awful lot of money.

For someone borrowing £100,000, that could add up to £30,000 or more.

But if you cash in your plan at just 55, it will probably be worth much less than if you left it running until 65, eating into your retirement income.

Talking of Your Retirement Income

Whatever age you are when you access your plan, you’ll be using up a huge chunk of the cash you would otherwise have had to see you through retirement.

And it’s a Very Expensive way to Pay a Mortgage

As the law stands, you can take up to 25 per cent of your pension pot as a tax-free sum when your cash it in but you can’t have any more than that.

(The rest goes to buy an annuity, unless you opt for drawdown which you don’t need to know about here.)

To clear that £100,000 mortgage, you would need to build up a pension pot of at least £400,000.

To achieve that, someone starting a plan at age 20 might need to invest around £300 a month, while someone starting at 30 might need to pay in around £500.

Frankly, you’d be much better off with a repayment mortgage it’s risk-free and far cheaper.