As the global economy continues to recover from the economic meltdown the interest rates on buy to let mortgages are falling rapidly. This has led to many people who have reached or are about to reach retirement age, considering purchasing a property to let. This can seem like an attractive proposition as the mortgage is both small and affordable whilst offering an income stream which will help any retiree live comfortably for the rest of their life.
The increased availability of affordable buy to let options will make it harder for tenants to leave the rental market and buy their first property. There are several factors which should be considered before removing a lump sum from a pension pot and investing in a property:
Withdrawing a large amount of funds from a pension pot may leave you vulnerable to a tax bill and this should be investigated and considered when working out the viability of investing. The tax will depend upon several factors including your investment portfolio, current income and pension; it is specific to each case and you should speak to a financial advisor.
Buy to let mortgages have low interest rates in order to attract people to the property market and continue its recovery. However, some of these mortgages also come with fairly hefty fees. It is not uncommon to be faced with a fee of 2.5% of the loan amount. It is essential to include this in your calculations. There will also be legal fees involved in purchasing a property and these will need to be carefully considered.~
Most mortgages have a maximum age limit of approximately 75 years old. This means your mortgage must be repaid by the time you reach this age. If you are already at retirement age this may not give you long to repay the mortgage and could seriously affect the monthly repayment you will need to commit to. It should be noted that HSBC has been penalized by the financial ombudsman for age discrimination after refusing to grant a mortgage to a couple because the husband would be over sixty five when the mortgage finished. This may mean that all lenders start to relax the age rules, particularly as people are generally living longer.
The majority of the time your investment property will need little attention. However, there will be moments when you discover that a new boiler needs installing or a water leak has destroyed part of a building. This can lead to fairly significant bills to repair and replace equipment and you must be prepared for such an occasion. Additionally it has been known for a tenant to destroy home furnishings and remove fixtures and fittings. This is highly unlikely to be insured and can equate to another costly bill. Tenants who choose not to pay can become a serious issue. Not only will they be likely to be damaging your house there can also be a significant amount of legal fees incurred in persuading them to move on. On top of this you will not even be receiving rent whilst they are in situ.
A rental property will need to be managed, there needs to be a process to locate tenants, check on them; before and during their stay and produce the tenancy agreement / manage the deposit (which must be protected by law). All these details can be looked after by yourself provided you take the time to familiarize yourself with the relevant laws. It is also possible to have the property managed by a letting agency who will handle the majority of these things for you – at a cost.
Earnings from rental properties are liable for tax although there are many costs which can be set against the earnings. It is essential to prepare an annual tax return or seek the assistance of a tax advisor to ensure you comply with the relevant laws.
Despite the risks listed above buy to let investment opportunities can be an excellent way of supplementing your income and building capital for the future. The most important aspect of moving into this market is to start your project with your eyes open as to all possible pitfalls.
By Davis Miller and PropertyTurkey.com!