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Using your pension for buy to let
Using your pension to invest in a buy to let property is not without risks, so here are some things to think about if you’re thinking about using your pension to invest in property and become a landlord:
You can take all or some of your pension pot as a cash lump sum (but remember the tax)
Property prices have been rising in recent years, but this is no guarantee of further rises
The private rental market has shown consistent growth, but rents have significant geographic variation
Mortgage rates are currently at historic low but buy to let mortgages are different to standard mortgages (typically more expensive and interest-only repayment)
Tax, agency fees, property vacancy and maintenance could all impact on your income
There are many investment options with varying degrees of risks and returns, but when the rules came into effect in April 2015, 16% of over 55s planned to use their pension pot to invest in property, according to opinion polls.
At the time of the changes, interest rates were at all time lows, making savings and ISAs seem less lucrative.
The private rental market has also shown consistent growth since the introduction of buy-to-let mortgages in 1996, with demand regularly outstripping supply.
But property investment is not without its risks. In essence, property prices have in general been rising fast in recent years, but this carries a risk, as what goes up can go down and if you buy at the market peak you may be caught out.
What’s more, the rental market has a lot of geographic variation and if you are thinking of renting out your property you should do comprehensive research on the rents in the area you’re planning to buy in.
It is often worth seeking independent financial advice before using your pension for any sizable invesment.
Buy to let: what you need to know
If you are thinking of buying a property to rent out and you do not have the money to buy outright, it’s likely you will need to look at a buy to let mortgage. This is different from a standard mortgage in the following ways:
Lenders take both your personal income and potential rental income into account when considering your eligibility.
The mortgage tends to be on an interest-only basis (but capital repayment is available), meaning repayments will not go towards repaying the loan. The sale of the property is typically used to repay the mortgage.
A buy to let mortgage is a commercial rather than a personal financial arrangement, meaning it is considered higher risk, so often you will need a larger deposit for a buy-to-let mortgage and rates tend to be a bit higher than standard mortgages.
It’s also worth understanding what will eat into your income as a landlord:
You will pay income tax at the marginal rate on your rental income and any profits from selling the property will be subject to capital gains tax
If you use an agency to let your property they may take a cut of around 15-20% of the rent
Your property may be vacant for periods of time with no rental income while you still have mortgage payments to meet
You are responsible for maintaining the property to a minimum standard
You should also understand your responsibilities as a landlord and make sure you are meeting all your legal obligations.