SIPP Mortgages In The UK
We often hear from customers who want to explore the possibility of a SIPP mortgage, and are looking for advice from a specialist. SIPPs are a lot more flexible than ‘standard’ pensions, and can be used to buy a variety of different assets – and this includes property under the right circumstances.
This article will cover:
- What is a SIPP mortgage?
- How does a SIPP mortgage work?
- What are the advantages of a SIPP mortgage?
- How much can my SIPP borrow?
- What type of property can you purchase with a SIPP mortgage?
- How do I get the best SIPP mortgage rates?
- Who are the best SIPP mortgage lenders?
- Speak to an expert on SIPP mortgages
What is a SIPP mortgage?
As mentioned above, property is one of several different investment types available to holders of SIPPs or Self Invested Personal Pensions. There are certain benefits to using a SIPP to invest in property that make it an especially attractive prospect, including multiple upfront tax advantages and eventual tax-free rental income.
Not all providers offer SIPP mortgages, so if you’re interested in exploring this option it’s important to speak to a pensions expert who already has good working relationships with SIPP mortgage providers. SIPP mortgages are complex financial arrangements, and we strongly recommend you speak to an expert to discuss your plans, so make an enquiry and someone will get back to you shortly.
How does a SIPP mortgage work?
There are two main ways that you can use a SIPP to purchase property:
- By using your SIPP to invest in a commercial property fund
- By using the funds held in your SIPP to raise a mortgage on an investment property you will go on to own.
The most straightforward option is to simply opt to invest your SIPP money in a commercial property fund. Property is often a good investment. However, not all SIPP providers allow you to hold property in your account, so you will need to make sure you choose one that does, usually a more specialised platform that may have higher fees than the more standard products.
The second option, which we’ll explore in more depth here, is to use some of the funds held within your SIPP to finance the purchase of an investment property. In this instance, a mortgage provider effectively lends money to the SIPP just as it would lend to any other eligible individual or business, and these funds are put towards the purchase.
What are the advantages of a SIPP mortgage?
The two main benefits of purchasing property via a SIPP mortgage are:
- Tax advantages
- Increasing the value of the SIPP
When an investor purchases property using their SIPP, they don’t have to pay any tax on the invested rental income it generates, and no tax is due on any increase in the property’s value. It is considered part of your pension portfolio that will ultimately provide your retirement income, and therefore not subject to the same tax charges as property bought with cash.
In cases where an investor is buying their own business premises, they pay rent at commercial rates, but claim it back as an allowable business expense.
The SIPP’s value can increase in line with appreciation of the property’s value over time, plus any rental income is re-invested in the SIPP. Of course, while property is usually considered a safe investment, it’s important to remember that its value can go down as well as up.
As the legal owner of the property, the investor is also entitled to sell it at any time, with the proceeds of the sale re-invested in their pension. Once they reach the age of 55 and/or start taking proceeds from the SIPP, they can alternatively sell the property for cash, benefiting again from any appreciation in value.
How much can my SIPP borrow?
You can use your SIPP to borrow up to 50% of it the value of its assets, so if you have £200k in a SIPP for example, you can expect a lender to offer you up to £100k towards a property purchase.
Most SIPP mortgage lenders will offer up to 70% Loan to Value ratios (LTVs) on the value of the property, so you will additionally need to raise a deposit of at least 30% from other sources.
If you are looking to maximise the amount you can put towards a property bought with a SIPP it is usually also possible to pool resources with other holders of the same SIPP plan, or to buy property as a joint investment with others providing their own non-SIPP funds.
What type of property can you purchase with a SIPP mortgage?
It’s not usually possible to purchase residential property via a SIPP, other than in rare cases where the property is part of a collective investment and is not the account holder’s main residence. SIPP mortgages are most commonly used to purchase commercial property.
Some investors who already run a business choose to buy their own commercial premises using their SIPP, while others opt to buy property that a third party will trade from. Rental income from the occupying business will then be paid tax free into the SIPP and re-invested, and can turn into a regular income stream paid directly to the owner of the SIPP once they start taking benefits from it.
In either case, it will be the investor’s responsibility as the owner of the property to put a lease in place to set out the rental terms, and most providers will insist on this before lending, so you should factor in the cost of purchasing a lease alongside other purchase costs.
How do I get the best SIPP mortgage rates?
Since they nearly always fall into the category of commercial mortgages, SIPP mortgage rates tend to be higher than standard residential or buy-to-let rates and are offered on a more ‘bespoke’ basis. To ensure you get the fairest and most competitive interest rates, it is essential that you speak to a specialist advisor with access to the whole of the market.
The actual rate you will be offered is calculated on a variety of factors, including the quality of your credit profile, level of risk to the lender and on an assessment of the business proposition, as would be the case for any commercial mortgage. Take a look at our guide to commercial mortgages for more information.
How do I find the best SIPP mortgage lenders?
Since SIPP mortgages are specialist arrangements, you’ll need to find a lender that offers commercial mortgages and is comfortable with this type of borrowing, and to ensure you get an accurate picture of what’s available, it’s important to work with an all-of-market broker.
Some high street providers such as Barclays and insurance companies such as Prudential can offer SIPP pension mortgages, as can several more specialised providers that may not deal directly with the general public. Speak to an expert to get the best advice on which lenders are worth approaching.
Speak to an expert on SIPP mortgages
If you have any additional questions on SIPP mortgages and would like to speak to a specialist about your own investment goals, don’t hesitate to call us on 0808 189 0463 or leave us a message here, and a member of our team will be in touch shortly.
We only work with accredited brokers who have existing relationships with lenders and access to the whole market.