Rise of pensioner landlords lured by bumper returns

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MANY older workers are snapping up rental properties to boost their income in retirement, it has emerged.

Banks and mortgage brokers have seen a surge in buyers in their fifties and sixties taking out buy-to-let mortgages as a number of institutions scrap upper age limits for borrowers.

This boom in older landlords is driven by buyers seeking more income in retirement because their pension won’t be as much as hoped.

It is also fuelled by dirt-cheap mortgage rates and reforms from Chancellor George Osborne that allow savers to take all their pension cash at retirement.

Instead of having to buy an annuity, or income for life, pensioners can use their cash however they see fit from next April.

Experts expect many to abandon traditional annuities, and use the money to put a hefty deposit down on a rental property. The idea is to live off the income that the rent produces.

They never need to repay the full mortgage borrowing as this can be done by selling the house at the end of the term. And if the property has risen in value they can take the profit, too.

While the average two-year fixed-rate savings bond pays just 1.75 pc, according to data firm Moneyfacts, buy-to-let offers an average return of 5.1 pc — but as high as 8 pc in popular areas. However, another surge in buy-to-let loans will make it even harder for first-time buyers to get on the ladder as they compete for properties.

Daniel Bailey, of mortgage broker Middleton Finance, says: ‘Over the past few months, we’ve seen an increase in buy-to-let borrowing from older people who see it as part of helping them get through retirement. People are disillusioned with pensions. They are seeing the amount they have paid in over the years and are frustrated with what they have got now.’ Elsewhere, broker Private Finance says it has seen a 20 pc rise in the number of older people asking about buy-to-let loans compared to last year.

Shaun Church, associate director, says: ‘Borrowers have seen volatility in the stock market, low savings and pension rates.

‘By contrast, buy-to-let property looks like a relatively safe way of making a decent return.’

Banks are handing out more than £2 billion a month in buy-to-let deals — a rise of 60 pc more than last year, according to trade body the Council of Mortgage Lenders.

Estimates from estate agent Savills suggest the Chancellor’s reforms could see an extra £10 bn annual boost if just one in five well-off pensioners decide to invest 10 pc of their pension pots in buy-to-let.

The Mortgage Works, part of Nationwide building society, recently scrapped the maximum age limit on its buy-to-let deals.

Previously, landlords would have had to pay off their loans by the age of 90, while new buy-to-let borrowers had to do so before age 75.

But from now on the only restriction i s that you must apply for the loan by the age of 70.

In theory, you would be able to take on a 35-year buy-to-let loan then — meaning the mortgage would not need to be repaid until age 105.

In such cases, the buy-to-let property would have to be sold when the landlord died or became unable to manage it.

Principality building society has also abandoned a maximum age for those taking out buy-to-let loans.

It used to demand borrowers repay their mortgage by the age of 70.

Others which encourage older borrowers include Kent Reliance, which lends up to the age of 85, as do Aldermore Bank and Mansfield BS.

Bath and National Counties building societies don’t state a maximum age, instead looking at an applicant’s circumstances.

With derisory rates on savings accounts, and pension payouts close to record lows, it is no wonder many older workers are seeking new ways to boost their income in later years.

They also know that as life expectancy increases, savings need to stretch for many more years.

The average return on a buy-to-let property is 5.1 pc and can be as high as 8 pc if you buy the right kind of house in a good area.

For a two-bedroom flat, the current average yield is 6.7 pc. This rate is the margin between the rent you receive and the amount of money you have paid for the property.

And this annual return only reflects the income you can take.

For example, someone who takes £50,000 from a pension pot could currently get an income of £253 a month by converting this in to an annuity — an annual income of £3,036.

But if they used this £50,000 as a deposit for a buy-to-let property worth £100,000, they would pay interest of £125 a month which they could deduct from rental income of £450.

Annual net income of £3,900 would give a yield, or return, of 7.8 pc.

This is worked out by dividing your annual income into the size of your original investment.

And if house prices keep on rising, there would be a capital gain in the value of the property.

Currently, new landlords can also enjoy some of the cheapest loans on record, with rates as low as 2.19 pc.

Interest-only payments on a £150,000 mortgage would be just £274 a month. Buy-to-let loans are not covered by new tough mortgage rules, making it easier to apply. However, there are fears some pensioners tempted by easy returns are not prepared for the extra cost and responsibility of being a landlord.

They may also not be ready for the property to be empty or for the value of the house to plunge. David Hollingworth, of broker London & Country, says: ‘Be prepared for periods when you do not have a tenant where, instead of generating income, the property will become a drain on your resources.’

Others fear some new older landlords may badly underestimate the time or energy needed.

Alan Ward, Residential Landlords Association president, says: ‘My concern is that some people may have seen the kind of returns that buy-tolet property can make but are not prepared for the level of responsibility they will have as landlords, or are unready for costs such as repairs.’

Money from rents is subject to standard income tax, though costs and mortgage i nterest are tax deductible. Profit from house price rises could attract capital gains tax.

To land a buy-to-let mortgage, you may need to show your income will meet the loan, and you will often need a separate income of £25,000.

The rent must also cover the mortgage interest plus, typically, an extra 25 pc. However, the lender may choose to use a higher rate of interest to make this calculation than that on your mortgage.