By guest author Taj Kang- an Associate Director at specialist contractor mortgage broker, Contractor Mortgages Made Easy.
Anyone in their early fifties is going to have to face working longer and for women that means another six years after 60. Therefore if, for example, you are 52 state pension won’t arrive until 2026, seemingly a lifetime away.
We are all thinking about pensions and retirement so much more than previously and people might even be suggesting a buy to let property might act as an alternative pension provision. Certainly it appears we can no longer rely solely on traditional solutions for our old age.
Will Buy To Let Bail Out Future Pension Pay Outs?
So what might a buy to let property do for you? For those with disposable income they may yet prove to be a winner. The important consideration, which puts off many younger investors in these stained times, is that a significant deposit will be necessary before you can consider a buy to let. It certainly makes an attractive alternative to the desperate rates savings are attracting these days or even the perceived additional risk if one has money in stocks and shares. Anyone in this position would do well to consider the buy to let option seriously.
Of course there is never a single solution and it would be naïve to suggest there is, we can all fall victim to changes in interest rates for example, although rates have been relatively stable it will only be a matter of time before they rise again. But during an economic downturn, job losses and a general lack of confidence in the UK and the European markets, a few tempting offers can certainly open wallets. Anyone who scans the property pages regularly will have noticed general house price reductions except for isolated pockets; Londonwill always set its own benchmarks it appears.
With people moving back into city areas rents are rising and it makes sense to capitalise on the lack of properties currently available for rent. High deposits mean first time buyers are taking longer to step on the property ladder and unless the ‘bank of mum and dad’ are flush the only way to have independence is to rent. Do not underestimate youngsters’ desire to set up their own homes, there is always a healthy rental market especially near higher education institutions.
Of course no one can guarantee things will run smoothly and risk is something we all have to address, but anyone thinking about taking the plunge might consider the following, especially if this kind of venture is going to be an alternative to pension provision.
Interest is guaranteed should you invest your money in a fixed rate savings scheme – a bird in the hand? What if property prices fall? Will it affect the money you have tied up long term. Funds, investment trust or share investments do have advantages. Tax free capital growth with an ISA may look an attractive dead cert depending on your outlook. Certainly if you know anyone at all who has direct experience regarding buy to let then it’s worth consulting them for a first-hand account. Think carefully whether a buy to let is for you.
Researching the local market thoroughly is key advice – perhaps it’s worth purchasing a buy to let in a more advantageous area and giving it to an agency to handle, it may cost but maybe your rental income and capital growth might be higher overall. This type of research cannot be underestimated and it’s worth looking at what is happening in your area, who is living there, who might be moving in, what changes are happening on the high street; maybe there’s expansion of a university or improvements to the public transport infrastructure that makes an area more attractive. OFSTED reports can mean a school’s popularity soars so families look for accommodation in that specific area.
They will certainly suggest you do a financial health check before committing to anything; shopping around for a good deal is important as many buy to let mortgages can carry a painful sting in the tail regarding arrangement fees. Once upon a time lenders would demand considerably more than 100% of any repayment to be covered by charges in rents and this needs to be considered when thinking just how much rental can be applied to a property. However desperate prospective tenants might be there is always a financial cut off point for an average rental property.
This has to be balanced carefully as buy to let mortgages are often set at a higher rate with bigger deposits. Ask yourself, can I manage if interest rates rise? What happens if I am unable to rent my property for three months, can I afford the repayments myself? Is there any slack in the system I am constructing?
Yes, there are downsides but potential benefits are significant and there are incentives which may well tip the balance; lower base rates for example are great news for buy to lets as many deals are tied in with tracking the bank’s base rate not a standard variable. You are unlikely to find a bargain regarding a buy to let deal but today you might find one with regard to the property itself.
You won’t get rich quick but a buy to let mortgage might well be the boost your pension fund requires and if you are prepared to shop around and seek advice you may well be sitting very pretty by the time 2026 comes around.