60 second guide to buy to let for retirementWhat to consider before becoming a landlord
26 November 2012
Increasing numbers of retirees are becoming landlords and relying on income from letting out property to boost their retirement finances.
According to BM Solutions, a specialist buy to let mortgage provider, 80% of landlords view letting out property as a supplementary source of income to their pension and around 60% are actively planning to live off their rental income.
We look at what you need to know if you're considering buy to let as a retirement investment.
How does buy to let compare with other sources of retirement income?
Over the past year traditional sources of retirement income, such as savings and annuities, have taken a hit through a combination of low interest on savings and a drop in annuity rates.
For example the average annual annuity income has dropped from around £5,900 a year in August 2011 to just over £4,900 a year in October 2012. And you can expect to earn just 0.9% interest on an average easy access savings account.
This pales in comparison to the buy to let sector. The rental yield a landlord can expect to earn from letting out their property stood at 6.7% over the past three months and has been comfortably over 5% for the past year. A rental yield of 6.7% on a £200,000 property would mean a rental income of £13,400.
Our planning your retirement gives a broad overview of retirement options
What are the risks involved in buy to let?
Property prices have been growing tentatively for the past few months, but a recovery in the housing market remains fragile. If your property dropped in value it could wipe out a considerable chunk of the rental income you have earned when you come to selling it.
And although the private rental market is expected to grow considerably over the next five years, there are no guarantees this will happen and if demand for rental property drops so will your income. You risk having 'void' periods, where there are no tenants in your property, and you'll need to find the money to cover your mortgage repayments during these times.
Finally, if the Bank of England base interest rate increases from the record low of 0.5%, you could face an increase in mortgage costs. You would need to ensure that you set rent levels that will meet all of your debt obligations.
Is it easy to get a buy to let mortgage?
Buy to let mortgages tend to be more expensive than residential loans, because they pose a bigger risk to the lender. Interest rates are typically about 1% higher than with an equivalent residential mortgage.
Lenders will also usually require a large deposit too, typically a minimum of 25% although if you have a deposit of 40% or more you’re likely to get the best deals.
You can use the buy to let calculator on Which? Mortgage Advisers to figure out how much you may be able to borrow
How can I make sure I make a profit?
Before going ahead you need to make sure you're confident that the rental income from your property will comfortably cover all your outgoings. You should be looking to make a rental income of at least 125% of your mortgage repayments and the other costs of renting out a property.
Speaking to local letting agents and looking at online property listings should give you a good idea of rental incomes in your area. You should then spend some time working out all your costs, everything from getting the property ready through to ongoing maintenance and letting agent fees if you choose to use one.
What else do I need to think about before becoming a landlord?
You should make sure you read up on what your legal obligations are, such as getting an energy performance certificate for the property, annual gas safety checks and making sure heating and water systems are working well.
You may also want to think about taking out landlord insurance to cover the cost of any damage to the property or to insure you against loss of rental income through tenants not paying rent or gaps between tenancies.