Should you release your pension fund to buy-to-let?
As the popularity of buy-to-let mortgages grows and retirees take advantage of the pension reforms, there’s an expectation we’ll now see more “silver” landlords.
The idea of generating a regular income from tenants, and maybe even making a profit on the house price, appeals to many. But anyone considering releasing pension funds needs to consider whether it’s the best option, because buy-to-let mortgages do come with risks.
Returns aren’t guaranteed
Property prices can go up and down and the property could be empty between tenants, with no money coming in. Any additional income from tenants will be subject to income tax, which can affect what you pay on all your earnings.
There could also be capital-gains taxes when you sell, while your family would also be subject to inheritance tax on the property when you pass away.
There are plenty of ongoing extra costs
On top of stamp duty, solicitor and completion fees, you may have to pay for letting agents, cover general maintenance costs and any emergency repairs. You might also choose to buy special landlord insurances to reduce your risk. If rules and regulations aren’t met, you may have fines to pay too.
You’ll also have more calls on your time as the properties don’t look after themselves. Plus you’ll need to keep up to speed with the latest regulations.
You won’t have quick access to your cash
To get a good return, you’ll generally have to leave it invested for long periods. Your cash will be more difficult to access if you need it quickly. So if you think you’ll need access to your money, a different option might be better.
It can be difficult to get a buy-to-let mortgage
If you don’t already own your own home or you have an income of less than £25,000, you may struggle to get a buy-to-let mortgage. You’ll also need good credit and usually need to finish the mortgage by the time you’re 70.
They’re not subject to affordability rules
The rental income will need to be verified by a surveyor and it will typically need to be 25% higher than the mortgage payment. So if your monthly payment is £1,500, the rent you charge needs to be at least £1,875.
You won’t necessarily go through the same affordability tests as other home buyers, but lenders will look at what you can afford based on income to check you can still make the payments when the property is empty.