Recent statistics have shown that the availability of buy to let mortgages for first-timers has surged since pension freedoms were implemented in the spring.
Since April, the number of deals that first-time landlords can access has risen by 13%, according to Moneyfacts. Over the last two years, the number of deals available has increased by two fifths.
The new pension rules reduced or removed drawdown caps and limits and allowed over-55s to access their defined contributions funds at their marginal tax rate (with one quarter of the pot exempt), rather than the 55% charged under the previous system. The new freedoms have arguably helped to stimulate the buy to let market, and it is little wonder that lenders are courting this new business.
How can the new freedoms be used to buy to let?
Depending on the income tax bracket, the average pension pot of £40,000 will be worth between £28,000 and £34,000 if withdrawn in its entirety. It is possible to minimise tax liability by withdrawing the pot in chunks.
This could therefore allow the typical retiree with a defined contributions fund to put down a deposit for a buy-to-let mortgage. This would buy between 15% and 19% equity in an average flat, maisonette or semi-detached house, or 20–25% equity in an average terraced house.
All other things being equal, the latter option may be the safer; at 75% loan-to-value (LTV) the choice of products is far wider, and the risk of falling into negative equity if the property depreciates in value is lessened. Of course, the right choice will depend on the individual’s appetite for risk, their investment goals, their preferred location and a whole host of other factors.
What new investors should bear in mind
Their ‘investment horizon’
How long do you wish to wait before your investment sees fruition? Though some property investors find success purchasing, renovating and selling properties quickly, the majority of landlords need to look to the medium or long term. Property prices and rents trend upwards over long periods of time, but in the short term economic conditions can cause them to fluctuate, meaning both your income and return on investment might at first be lower than you’d hoped for.
Property management can be an expensive business; from repairs to mortgage repayments to income tax and everything in between, the rent you charge has to stretch quite far. The average annual running costs for a single buy-to-let property add up to just shy of £8,400 , so don’t expect a life-changing boost to your income from your very first property, especially if it is an encumbered one.
The greatest rewards typically come with a greater potential for pitfalls, and whilst buy to let can be very profitable, there are a number of things that can go wrong.
For starters, property prices are not guaranteed to rise, though this risk lessens over longer periods. There is also the potential for lost income when something goes wrong with the property, or your tenants fall into rental arrears, or your property becomes empty for a spell (known as a void period).
It’s important to mitigate the potential risks by keeping a contingency fund.
The service you’re providing
Perhaps most importantly, landlords should remember the chief factor that distinguishes buy to let from other investments: that it is also a business. And like any business owner, landlords have a responsibility to their tenants.
Many of these responsibilities, such as basic repairing obligations, deposit protection and correct eviction procedures, are enshrined in law, and you can face fines and even prosecution for falling short of your legal duty. It is therefore imperative for all landlords to know what is expected of them.
If you are a first-time landlord, you might benefit from instructing an accredited agent to assist with the management of your property. You may also wish to join one or more landlords associations in order to benefit from guidance and the shared expertise of its members.
In addition, always be sure to seek financial advice when considering your retirement options.