With the cost of living ever increasing, people have a hard time building long term wealth. At times it seems like the only asset you have is your pension. But if you're not collecting it yet, it isn't counted. That is until now. Some banks are now honoring future pension payments to secure collateral loans like mortgages. Here's how.
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Things you need
- Vested pension
- Willing bank or lender
Be within 5 years of receiving your pension payments. While this is still a new concept to banks, a few will bite if you can show that within 60 months you will be receiving a secured fixed income from a pension plan. It should be noted that you should look into receiving your pension early. While you'll receive less money up front, it may be worth it to help secure your loan. The old adage "a bird in the hand is worth two in the bush" is relevant here.
Print all appropriate records according to your pension payment plan. This includes not only how much money per month you're going to receive, but also what occurs in the case if your death. Remember the lender is still going to want their money. Many pension plans offer benefits to spouses for reduced rates. Selecting this option will give the lender a little more comfort because the chance of both of you passing within in a short period is slimmer than just one of you passing on.
Consider taking a lump sum or partial lump sum payment. This is another option that many pension plans offer. By signing the lump sum over to the bank when it comes due, you are in essence promising them a down payment. Think of it as a one-time balloon payment during the life of your loan.
Purchase a life insurance policy which covers the length of the loan. This is another way which the bank will be assured it will get its money. It will show them that if you pass during the loan, you'll have enough money to cover all of your debts.
Keep your credit in good standing. Because banks may be reticent to allow you to use pensions for collateral loans, you want to show them that you have a good track record of paying off your debts. Keeping your credit report in good standing will offer them that insurance.
Avoid biting off more than you can chew. When people start receiving pensions, it usually means they are in the twilight of their earning potential. You earn less money year to year than when you were working full time. This also means your lifestyle needs to be less costly (unless you have other investments.) Make sure that the collateral loan you're securing will fit into your new budget.
Tips and warnings
- Because your pension is a secured payment which you and your spouse will receive until death, look to use other things for collateral loans first. You'd never want to leave yourself short in the case of sickness because you promised away future pension payments.