Over the last month or so, buy to let mortgage lenders across the board have been slashing their maximum age limits for new and existing applicants. This is no doubt in response, at least in part, to Chancellor George Osborne’s dramatic overhaul of the pensions system, which he announced in his March 2014 Budget speech.
The full changes, which will allow any individual over the age of 55 to withdraw as much of their pension as they wish subject only to marginal tax rates, will be implemented in April 2015. In the meantime, a few smaller changes have already come into place:
- The maximum pension size over-60s can withdraw as a lump sum under a ‘trivial commutation’ has increased from £18,000 to £30,000;
- The maximum amount you can withdraw each year through a capped drawdown arrangement has increased from 120% of an equivalent annuity to 150%;
- The number of ‘small pots’ over-60s can withdraw as a lump sum under any circumstances has increased from two to three and the maximum size of a small pot has increased from £2,000 to £10,000; and
- The maximum guaranteed annual retirement income required to access flexible drawdown, through which you can withdraw as much as you want each year, has decreased from £20,000 to £12,000.
The result is that in the 2014–15 financial year an estimated 400,000 people will have more flexible access to their savings 1, and many are clamouring to invest it in what is considered the surest asset in the UK – rental property.
Why buy to let?
Rock-bottom interest rates benefit borrowers and scupper savers. When interest rates are low it encourages banks to lend and people to spend, and theoretically keeps the economy growing. The Bank of England’s Monetary Policy Committee, which is responsible for setting the UK base rate, has kept rates at an all-time low for over five years.
This means landlords pay less buy-to-let mortgage interest, widening their margins and making the investment yields that much more attractive. And whilst rents over the past year have actually risen more slowly than inflation 2, house prices have risen far faster for far longer, giving landlords the added advantage of robust capital returns.
It is little wonder that the buy-to-let sector has seen a strong recovery in the years since the financial crisis. In the last year alone, the number of buy-to-let loans issued has increased by 43% and the value by 57% 3.
Invasion of the ‘silver savers’
Disillusioned by pension returns and dissatisfied with savings, many individuals near or in retirement have turned to property. Several brokers and lenders have reported an increase in the average age of their buy-to-let applicants; our own customers at Commercial Trust are, on average, 48 years of age.
The Telegraph’s Richard Dyson reported at the end of last month that the current value of the private rental sector is fast approaching that of the UK’s entire pension savings (currently worth £1.6 trillion) 4. This rate of growth, coupled with the possibility of a further upturn next April, is alarming some commentators, who feel that the boost to the sector might not only further inflate prices, but also leave thousands of investors in potentially difficult situations should the current climate for new buy-to-let entrants change for the worst.
Like any investment that offers high potential rewards, buy-to-let can be risky; and like any risky investment, those who stay with it for longer have the greatest chance to recoup any losses they might incur.
Firstly, there is the ongoing saga of when interest rates will finally begin to rise. Thanks to Bank of England Governor Mark Carney’s new stance on regular communication of forward guidance, we know that this will happen “sooner rather than later”, and when it does, the cost of borrowing is going to start inching up.
This will increase the running costs of a property and eat into yields; less problematic for an investor who can service a short-term setback knowing he or she will see their perseverance rewarded by future capital growth, but more so for a retiree who is hoping for a boost to their income.
Then there are the ubiquitous risks: what if the property sits empty, something needs repairing, or a tenant is unable to pay the rent? These are all costly problems, and the risks can never be entirely avoided – only mitigated, by investing in the right property, keeping it in good repair, and thoroughly referencing prospective tenants.
Managing these risks requires hands-on investment. Of course, you can hire somebody to manage the property for you – but this is a further cost.
There are benefits to owning a property as a retirement fund. If it pays for itself, it can be a good source of income, and unlike an annuity, if you can pay off the finance without needing to sell your property, it will remain in your estate after you die. But it must not be forgotten that buy-to-let is an integral part of the housing market and it needs professional landlords who do their research, know the market and have a sound knowledge of the laws surrounding it.
Written by Ben Gosling for Commercial Trust. Commercial Trust is a specialist commercial broker that offers expert product and investment advice across the buy-to-let, bridging and commercial mortgage markets.