With traditional pension schemes underperforming, more are turning to bricks and mortar to ensure a comfortable old age. Steve Mansfield, partner at Mortgage Talk Direct, looks at the buy-to-let ‘pension’
These days, the retirement picture is starting to look a little less than rosy, due to a combination of a relatively weak global stock market and a massive pension re-think by employers. Many are now putting their hopes in property, which is seen as a relatively good place to put money long-term.
The scenario goes something like this: homeowners who have been on the property ladder for a few years will, thanks to steadily rising prices, have built up a reasonable amount of equity in their house or flat. As such, especially where incomes have steadily risen, these fortunate individuals will have seen their mortgage payments plummet to a very affordable level.
Many of these householders, particularly in the South East, will be looking to buy an additional property instead of merely using the equity already accrued in their existing home to fund their next move. Now, this actually makes sense on a couple of levels especially as, despite the occasional peak and trough, UK property prices have shown, and will continue to show, a strong upward trend for the indefinite future.
Firstly, provided that you are sensible about the type of property you choose and the area that it’s in, the rental income available from the property will generally exceed the cost of any mortgage. Certainly on an annual basis the range of discounted rate mortgages currently on offer make it even more attractive to buy a property for the purpose of renting it out. And don’t forget that even if the net rental income only just covers the mortgage cost, you’ll still be quids in after a few years when you take into account the likely rise in property values over this period.
Secondly, if you buy an additional property, particularly as an investment, you can make your own decision as to whether you’d rather live in your existing home or the new one. In fact, mortgage schemes now exist that will enable you to acquire a second property without too much difficulty. Nowadays many banks and building societies will take a pragmatic view of your mortgage borrowings, simply by looking at the cost of your existing borrowings over twelve months and treating them as equivalent to a credit agreement. In other words the total cost of the mortgage on your initial property is viewed in exactly the same way as your credit card repayments or bank loan. All that’s needed is confirmation from an ARLA-accredited lettings agent of the value of the likely rental income available from the property. The lender should be happy to accept the mortgage application on the new home concurrent with the existing mortgage. Many lenders don’t even need proof that the property is actually being let out.
There is another big advantage to this new flexible attitude toward buy-to-lets. In many situations, especially where the property being purchased is a new build, there is a lot of pressure on the buyer to exchange contracts and complete at very short notice. Quite apart from the strain that this places on the conveyancing process, such a tight deadline often means that buyers will find it difficult, if not impossible, to find a purchaser for their own property. Of course it helps in these situations to know that many brokers and lenders can turn around a mortgage application – and issue a formal offer – in twelve days or less. But this still doesn’t help the borrower to find a buyer for his or her existing home.
Thankfully, the buy-to-let scenario is equally applicable to this sort of situation. As such, it allows the buyer to complete their purchase of the new build property while waiting to sell their existing home. And, what’s more, the scheme even allows you to take a theoretical 95 per cent loan up to £150,000 and only requires a 10 per cent deposit above that figure.
But is there still a market for buy-to-let properties? Certainly within affluent urban areas, and especially inside the M25 zone, there are large numbers of young professional people who have a good income but minimal savings. These people are generally at a disadvantage in their quest for property ownership, as they will often struggle to afford a deposit on a reasonable property. However, this doesn’t deter such people from wanting to live in a nice location. So there is a strong demand for good quality rented accommodation.
Because lenders are now happy to look at rental income rather than just salary, the buy-to-let market is starting to move away from the sort of properties that were traditionally occupied by those with a lower income. In fact, the market dynamic has shifted almost completely towards professionals on short-term contracts, typically a six-month shorthold agreement.