David Forsdyke, our Later Life Finance expert, explains how certain mortgage products can benefit older landlords with buy to let properties, in ways you might not expect.
More and more homeowners over the age of 55 are releasing equity from their primary residence. They are doing this for a number of reasons, including to help children and other family members financially, to make home improvements, pay off an interest-only mortgage, or tidy up other debts in retirement. However, many people are unaware they can also use their buy to let property in the same way.
Landlords who have invested in property over time, perhaps as an alternative to pensions, often find themselves asset rich but cash poor when they come to retire. They are left wondering how to unlock the cash tied up in their buy to let portfolio without selling the income-generating asset.
The answer to this conundrum lies in a product called an over 55s Buy To Let Mortgage. This is an ‘Equity Release’* product that is available on buy to let property. It allows landlords and property investors to unlock some of the equity in their portfolio, tax-free.
The amount available depends on your age and the value of your property. For example, if you are 75, you can borrow up to 39% of the value of your investment property. This equity could be used for a number of reasons:
1. Top up your income
Let’s imagine you’re 68 years old and about to retire. You bought a property 30 years ago for £200,000 to let it out and have kept paying an interest-only mortgage of £150,000, which was 75% at the time you bought it. The value of your let property has increased to £700,000. You let it out for £2,333 per month, or £28,000 per year, which is a 4% yield. Your mortgage is at 3.5% and costs you £438 per month.
You take out an over 55s Buy To Let Mortgage for £150,000 at an interest rate of 5.63%. Yes you are paying more interest, but now it is rolling up on top of the loan, meaning your income is suddenly boosted by £438 each month, over £5,000 per year, because there are no longer any mortgage payments to make. In addition, you benefit from all future rises in rental payments.
2. Renovate or improve your buy to let property
In the example above, the maximum available through this unique Buy to Let product is £224,000. This means you could raise an additional £74,000 which can be used for renovations, refitting and redecorating. These improvements could increase the rental income from your property and enhance its value further.
3. Paying for your care
For many of us, one concern is what happens if our health declines to a point we need full time residential care. This can be expensive, so let’s look at a scenario where your care costs £1,000 per week. Your normal income is not enough to cover this cost. Your home is worth £900,000 which you could sell to fund your care. However, the emotional ties to the family home are strong and the idea of selling it could have a very negative effect on you and your family. As an alternative, you could let out your current home and raise an over 55s Buy To Let Mortgage which you draw down in instalments to pay for your care. This allows you to keep ownership of your property, so if your health improves you could also return home in the future.
4. Helping your children and grandchildren
Let’s imagine you have a small portfolio of let properties which have benefitted from growth in value over the last 30 years. You want to provide your family with a lump sum, but do not want to sell any of your properties, as that will see your income from them drop. An over 55s Buy to Let mortgage would allow you raise a lump sum which you can gift to those who need it. You also avoid the immediate Capital Gains Tax implications of selling an investment property.
The pros and cons
There are of course a number of disadvantages to consider. For example, interest rolling up obviously means your mortgage is getting bigger. This reduces the remaining equity available in the future. Another downside is that the mortgages will need to be repaid following your death, which is normally done by selling the property. This means you can’t pass your investment properties on to your beneficiaries (unless of course they have an alternative source of funds to repay the mortgage).
On the upside, you benefit from receiving all of the rental income, which is likely to steadily increase with inflation, instead of servicing a mortgage payment with it. You also benefit immediately from any surplus funds released, which you might be able to use to your advantage in all sorts of ways.
With so many pros and cons to consider, good advice is important, and at Knight Frank Finance we will take you through all the options, helping you make a well informed decision.
Contact David or a member of his team by calling 01483 947764, or email us.
*The regulatory definition of Equity Release only applies to products secured on your main residence. However, the over 55 buy to let product works in the same way as a Lifetime Mortgage, the most common form of Equity Release. Find out more about Lifetime Mortgages here.