Buy-to-let property is one of the most popular investment options for the over-50s.
The most recent government figures show the median age of the average landlord in England is 58, and almost two-thirds (63%) of landlords are aged 55 or older – up from 59% in 2018.
The pension freedoms introduced in the last decade have given people much more choice over what to do with their retirement savings.
It is now possible to take money out of a pension (after the age of 55, rising to 57 in 2028), and use it either as a deposit on a buy-to-let property, or to make a purchase outright (although there are many considerations to take into account before doing so).
Buy-to-let mortgages can be used to make up any shortfall in the cash needed to buy a property for renting out – and lenders are often happy to make loans to landlords even if they are no longer working.
The buy-to-let market
Despite the appeal of bricks and mortar, however, it has become harder for amateur landlords to profit from property.
There have been changes to tax policy – with rises in stamp duty, mortgage interest tax relief reducing for many and ‘wear and tear allowance’ altering too.
On top of that, the Bank of England base rate has risen, and the increased cost of living is squeezing disposable income and making it harder to get a decent return from a buy-to-let property.
“Higher interest rates have put additional pressure on landlords, pushing up monthly mortgage payments and therefore putting the squeeze on income from buy-to-let property,” explains David Hollingworth, Associate Director of Communications at mortgage broker London & Country.
“The rising cost of living and higher rates have also reduced the level of activity in the housing market, which has in turn seen house prices fall back a little in many areas.
“However, there are many that still see the benefit of investing in property. [House] prices haven't fallen back as much as many anticipated, supported by the lack of supply.
“With fixed-rate mortgage rates already improving and the base rate expected to start dropping again this year, the rate outlook may start to brighten.”
Hollingworth points out that, despite recent challenges for landlords, demand for rental property has remained resilient (down 11% on last year, but still a third higher than the 5-year average, according to Zoopla), leading to rises in rents in many parts of the UK.
Howard Levy, Sales Director at broker SPF Private Clients adds: “Many clients who have invested in years gone by take a steady income, as well as seeing the value of their portfolio increase over time. I would mention, though, that there can be a fair share of work involved.
“Managing a portfolio can take up time – it is not like an investment in unit trusts, for example, which can be left over years without much input.
“Managing tenants can be a full-time job, depending on how large your portfolio is, and the type of buy-to-let investment held.”
Getting a buy-to-let mortgage
While lenders can be reluctant to offer residential mortgages that are scheduled to run past a borrower’s retirement age, loans for buy-to-let can be more flexible.
Holly Tomlinson, Financial Planner at Quilter, says: “There are various lenders that will consider lending to those without an income, as they tend to view buy-to-lets as self-funding investments.
“When it comes to mortgage terms, many lenders will look to lend to age 80, but there are some non-high street banks that will lend to age 94.”
When deciding how much they will lend, banks and building societies will typically check that likely rental income will cover the mortgage repayments by a certain margin.
This is different to ‘normal’ residential mortgages, where your own income will be subject to checks to make sure you can pay off the loan over time.
Lenders may also require that landlords have documentation showing alternative income sources or sufficient savings to cover any shortfalls or ‘void periods’ when the property is empty.
Levy says: “Lenders tend to provide finance based on the property rent more than the landlord's income, [but] if a retiree is looking to invest, they will [also] take into account their pension income and outgoings as well as any assets in the background that could be drawn against if needed.”
Buy-to-let mortgages are generally run on an interest-only basis – 82% of such loans, according to the Bank of England. This means repayments only go towards paying off interest (and if any are missed, then the property could be repossessed).
The original capital for the mortgage is only recouped when the mortgage ends and the property is sold - so you'll need to be sure you can make up any shortfall if the value has dropped over the years.
One of the easiest ways to get a good rate on your mortgage is to get a lower ‘Loan to Value’ (LTV) ratio, which is the difference between how much cash you have to buy the property, and how much you’ll need to borrow.
The more deposit you’re able to put down, the better the rate you’ll likely be able to get to help bring down your monthly interest repayments. You’ll need at least a 25% deposit for most lenders to consider a buy-to-let mortgage too.
Scott Gallacher, Financial Planner at independent financial adviser Rowley Turton, says that while a pension cannot be used to invest directly in a residential buy-to-let, it's possible to take money out of your pension and use this to buy, or part-finance, property.
“However, I would urge caution on this,” he adds. “Investors should seek professional advice, especially as, apart from your tax-free pension commencement lump sum, you most likely will incur an income tax charge on withdrawals from your pension fund.
“[Cashing in] a £250,000 pension fund will not give you £250,000 to buy a property.”
Levy from SPF Private Clients adds that using all your pension to buy a property isn’t something he normally advocates:
“As a broker I like to ensure that no client has all their eggs in one basket, as putting everything into one investment is very risky.
“I usually recommend a healthy balance between numerous assets, especially as funds invested into a property are illiquid – so a good emergency fund, as well as a void period fund, are imperative.”
A ‘void period fund’ is a bank of money saved for the moments when your property might be empty between tenants. Having this reserve will mean you can continue to pay any bills during these unoccupied periods.
Potential downsides of property investment
Gallacher points out that putting money in buy-to-let entails the same risks as investing in the stock market. “Income and capital values can fall, and you get back less than invested,” he explains, before adding that changes to buy-to-let mortgage interest tax relief have caused more headaches for prospective landlords.
“There are tax issues for those financing their purchase with a mortgage, and you have additional hassle factors that traditional stocks and shares investments don't give you,” he says.
“[For example], your fund manager doesn't ring you in the middle of the night complaining that they have no hot water.”
That said, becoming a landlord could well be an attractive new ‘career’ for many – so if you’ve got the knowledge (and energy) to take on this task, owning buy-to-let property can be a welcome change of pace for some.
If you’re thinking of investing in a buy-to-let, you’d obviously first check out the market rates for rent to get a guide on how much you can charge. However, it's vital to properly account for the additional costs of such an investment, Hollingworth says.
“Mortgage payments will be a key expense but running a property comes with a number of responsibilities and costs, so it's important to consider how hands-on a landlord you may be,” he adds.
“A letting agent may be an important part of the day-to-day running of a buy-to-let and can help with some of the regulatory responsibility as well as sourcing tenants and handling maintenance issues.”
If you do use the services of a letting agent, they will likely charge a fee, often gained from taking a slice of the rent each month – so the amount you’ll receive will be even lower if you choose this route.
Hollingworth advises enlisting the help of an accountant or tax adviser to understand the overall financial position.
“Of course, there will be costs to buy and sell the property, as with any home. Buying an additional property incurs a stamp duty surcharge as well, so these expenses can be higher for landlords.
“As a result of the cost of entry and exit, buy-to-let is usually an investment for the longer term.”
Don’t forget about Capital Gains Tax (CGT) too – as this property won’t be your main residence, you could well be liable to pay CGT on anything you make, over the amount you bought it for, when you come to sell.
When you die, it could also become part of your estate, and therefore increase the likelihood of triggering Inheritance Tax, so consider expert financial advice with an investment of this magnitude.
Things to consider before becoming a landlord in retirement:
- Will you undertake maintenance yourself? You’ll need to be available to perform repairs and deal with any issues from tenants. While you might be in good health now, will you be able to continue this for the long term?
- Can you afford the deposit from your pension fund? If you’re using your pension to fund the purchase, consider financial advice before spending a large amount. Having diverse sources of income can help protect you in the long term.
- What happens if the property is empty? A ‘void property fund’ will tide you over in the event of not being able to find tenants. Make sure this is in an easy-access account in case of needing to make emergency repairs too.
- Be ready for extra costs – You'll need to think about extra stamp duty, reduced tax relief and wear and tear allowance – plus possible Capital Gains Tax when you come to sell.
