He had enough savings to cover the deposit and costs, but needed a 250,000 mortgage to complete the purchase.

He approached a number of Spanish lenders but their interest rates were not competitive because they charge extra to non-residents. So he contacted Liam Ferguson of Ferguson & Associates, a mortgage broker based in Ratoath, Co Meath.

"Brian's family home in Cork was worth over 600,000 and his existing mortgage was just under 100,000. He was paying the bank's standard variable rate, which was quite uncompetitive at 4.53%, or 1.53% above the European Central Bank (ECB) base rate, " says Ferguson. Brian was approved for a new 350,000 mortgage, enough to replace the expensive loan on his existing home as well to buy the place in Spain. By switching to a tracker mortgage, he was able to cut the rate of interest to 3.95%, or 0.95% over ECB.

Brian had read about the tax advantages of pensionbacked mortgages where, rather than making loan repayments out of after-tax income, the debt is repaid from the tax-free lump sum that people get at retirement.

But he believed pension mortgages were open only to selfemployed professionals and company directors rather than PAYE workers like himself.

"We examined his company pension scheme and established that, using conservative assumptions, Brian's tax-free lump sum at retirement was likely to be around 280,000, or comfortably more than the cost of the holiday home, " says Ferguson.

"So we split the loan, with 100,000 set up as a traditional repayment, or principle-plus-interest, loan and the remaining 250,000 as an interest-only facility, with Brian paying back the original sum borrowed from the proceeds of his retirement lump sum."

The payments on the interest-only mortgage are substantially lower than on a comparable repayment mortgage and Brian is using the extra cash flow to plough more money into is pension through additional voluntary contributions (AVCs).

A traditional repayment mortgage of 250,000 over 25 years would have cost 1,313 per month whereas the interest-only repayments are 823 per month. Brian is investing 800 per month as an AVC but, after tax relief at 42%, the net cost drops to 464 per month.

So the combination of interest-only repayments on the mortgage and tax relief on the AVCs means that Brian pays out less each month than he would on a traditional repayment mortgage. His projected AVC fund at 65, assuming a fairly conservative 5% annual fund growth, is over 390,000, more than replacing the 250,000 he'll need to withdraw from his fund at retirement to repay the original loan.

Ferguson points out that pension-backed mortgages are riskier than traditional repayment loans, mainly because there are no guarantees that the pension fund at retirement will be big enough to repay the mortgage.

But Brian was comfortable with the extra risk because the projections for future growth in his pension fund are conservative and leave a big cushion for possible underperformance. He also plans to use bonus payments from work to begin chipping away at the interest-only debt. And if everything goes wrong, he can always sell the place is Spain to cover any shortfall between his pension lump sum and the interestonly mortgage.

Pension-backed mortgages are not for everyone. But if you are prepared to accept the extra risk, they can be a very tax-efficient way of borrowing. The recently-introduced freedom for all PAYE employees to choose their own AVC product rather than being forced to accept their employer's AVC scheme opens pension-backed mortgages as a possibility for those outside the ranks of the selfemployed.