Buy to let lenders typically want their borrowers to pay off their mortgages by the time they have reached seventy years of age. These rules have not helped people who are coming up to retirement with perhaps some cash available, but needing a mortgage for the rest from entering the market.
However many buy to let lenders are reconsidering these age restrictions in the wake of government plans to give pensioners unlimited access to their retirement savings. Recently a specialist buy to let firm called The Mortgage Works have amended their criteria to allow people up to the age of seventy to apply for a buy to let mortgage. In addition they will allow the mortgage term to stretch to thirty five years, meaning that in theory the mortgage could still be live as you reach your hundredth birthday.
These actions by The Mortgage Works are likely to prompt other lenders to follow suit and shake up buy to let lending. It will for the first time actively encourage silver landlords to consider buy to let as a long term sustainable source of retirement income.
Buy to let mortgages have always had their attractions when taken out on an interest only basis, but the need to pay it off took away some of the advantages of this type of mortgage. But effectively for many not having to do this, it does change the proposition when coupled with say a tax-free lump sum from a pension. A working example could mean a pensioner buying a buy to let property for £100,000, with £25,000 deposit coming from the tax-free lump sum of a total £100,000 pension. This would mean that £75,000 would need to be raised on a mortgage, and if an interest rate of 4% was charged then the annual mortgage cost would be £3,000. This figure could be taken up to say £3,300 if you consider that the £25,000 invested would have perhaps given you just over 1% interest. Against this on the type of property I have in mind in this area I believe that £560 per month would not be unrealistic rent to claim bringing in a total of £6,720 per year rent. I feel it would be prudent to take away 25% of this amount for times when the property is empty and for repairs that are needed bringing in a net amount of £5,040. After these costs it would bring in income of hopefully at least £1,740 a year.
Looking on the bright side it could be argued that this figure is giving you at least 7% on your original £25,000 investment, over and above what you have received from the bank on interest payments. Also there is potential for growth on the property with the possibility of rental increases to increase the yield. But on the flip side it needs to be noted that interest rates can go up, and how house prices can go down. Buy to let needs to be thought of as more of a business than a passive investment as it can demand your time. Overall I think that the new the developments are certainly interesting and could be right for some people, but I would definitely take independent financial advice before committing to this type of venture, as this area is complex with lots of pitfalls for the unaware.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages, general insurance and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
23rd June 2014
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