Buy to let in later life - how investment property can make a difference in your retirement

David Forsdyke, our Later Life Finance expert, talks about the growing range of options designed specifically for older landlords, and how they can make a difference in ways you might not expect.

It is now possible to take out a Buy to Let mortgage that works the same way as an Equity Release Lifetime Mortgage. Interest can compound, or ‘roll up’ on top of the loan so there are no monthly payments to make. The current choice of products is currently limited, but this is set to increase as lenders realise the majority of private landlords are steadily getting older and might need to access the wealth tied up in these properties in their retirement. As you would expect, loan amounts are limited because of the interest rolling up. For example, a 70 year old won’t be able to raise more than about 34% of the value of their property. However, the practical applications for older people with this type of product are many. Here’s just a few to set you thinking, but please do contact our Later Life Finance team if you would like to know more:

Enhancing income

Let’s imagine you’re 70 years old and recently retired. You bought a property 20 years ago for £300,000 to let it out and used an interest only mortgage of £200,000 which you are still paying. The value of your let property has increased to £600,000. This is not an unreasonable assumption given house price inflation over the last 20 years. You let it out for £2,000 per month, or £24,000 per year, which is a 4% yield. Totally Money* reported yields much higher than this in some parts of the country, but let’s keep it conservative for the purpose of illustrating what’s possible here. Your mortgage is at 3.5% and costs you £583 per month.

You are still very active and would like some additional income on top of your pensions and rental income. You could take out an Over 55 Buy To Let Mortgage for £204,000** at an interest rate of 5.78%. Yes you are paying more interest, but now it is rolling up on top of the loan, meaning your income is suddenly boosted by £583 each month, or £7,000 per year, because there are no longer any mortgage payments to make.

The downside is obviously the interest rolling up and your mortgage is now getting bigger, but interestingly the remaining equity in your let property would still be in excess of £200,000 in 16 years’ time, and you would have benefitted from receiving all of that additional rental income which is likely to have steadily increased with inflation.

Paying for your care

A lot of homeowners worry that they will need care in old age, and the cost of care can be high. Let’s imagine you’re 80 years old and your health has declined to a point you need full time residential care which costs £1,000 per week. Your normal income will not cover this cost. Your home is worth £900,000 which you could sell to produce a lump sum which would cover your care costs for a long time. However, for many older people and their children, the emotional ties to the family home are strong and the idea of selling it could have a very negative effect on everyone. If this rings true with you, an alternative would be to let out your current home and raise an Over 55 Buy To Let Mortgage of £396,000** which could be drawn down in instalments to pay for your care. This allows you to keep ownership of your property, so if your health improves you can return home in the future.

Helping your children and grandchildren

In one of my previous articles, I talked about how the bank of Mum and Dad (or Grandma and Grandpa) is increasingly helping younger generations onto the property ladder. We have seen first-hand a growing desire from older people to pass their surplus wealth down through the generations. If you have property you let out, a Buy To Let mortgage can be an excellent way of doing this. Let’s imagine you are 75 years old and have a small portfolio of let properties which have benefitted from growth in value over the last 20 years. You now have surplus income from these lettings, which you are happy to give away to your family. However, a significant lump sum would have a much more positive impact on them than regular small gifts. You could sell one of your let properties for, say, £600,000 in order to release a lump sum, however this would trigger a capital gains tax (CGT) liability as you bought it for £200,000 20 years ago. You would also incur selling fees and would lose the income from that property. An alternative is to take out a Buy To Let mortgage on one or several of your let properties in order to raise the lump sum and make the gift to your family. This allows you to retain your properties, avoid the CGT and costs of selling, and continue receiving the rental income.

There are of course pros and cons in all of these scenarios, and we recommend you seek professional advice. If you are over 55 and are thinking about what you can do with your let properties, your mortgage or your current home, speak to a member of our Later Life Finance team. All our Later Life advisers are qualified in Equity Release and have access to a wide range of products tailored for older homeowners. You can contact us on 0203 918 7259 or visit our webpages

*the Totally Money Buy to Let yield data can be found here.

**loan amounts based on Canada Life’s current criteria which take into account age and the value of the property. These are subject to underwriting and may change