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Updated: 10 Jul 2019

More over-65s are taking out buy-to-let mortgages. Could becoming a landlord fund your retirement?

Should you spend your pension on a buy-to-let property?

Buy-to-let investors are getting older, according to new research that shows there was an increase in the number of buy-to-let mortgage applications from 65 to 75-year-olds in 2018.

Specialist broker Commercial Trust Limited found over-55s now account for nearly 40% of all buy-to-let purchase and remortgaging activity, and the share of buy-to-let mortgage applications from 65 to 75-year-olds specifically has seen an increase of more than 5%.

A combination of pension freedoms, a subdued property market and an increased number of buy-to-let products for older people can make property seem like an enticing option, but is investing in buy-to-let in your retirement really a good idea?

Which? weighs up the pros and cons.

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Why are more retirees investing in buy-to-let?

Despite news that a quarter of landlords are looking to sell at least one property in the next 12 months, buy-to-let could still be a way of making a decent yield.

Several factors mean conditions are particularly favourable for older investors.

1. Pension freedoms mean cash is readily available

Since the introduction of pension freedoms in April 2015, those with defined contribution (DC) pensions have had the opportunity to use their pots however they wish.

There are four main options on what you can do with your DC pension, including buying an annuity, using pension drawdown, cashing the whole pot in or taking lump sums.

Each has its pros and cons, but if you want to put down a deposit on a buy-to-let property it's likely that you'll either have to cash in the whole pot or take a lump sum - and both are likely to result in a tax bill, as you'll only get 25% of the whole pot or lump sum tax-free.

2. Falling property prices mean you could get a bargain

In a market where property prices are falling month-on-month (there was a drop of 0.6% in February, according to the Land Registry House Price Index), it could be a good time to grab a bargain.

However, with capital growth so low, you'll need to focus on the potential yield you could earn from letting your property.

Research has found that landlords across England and Wales made an average gain of £79,770 in 2018 - and in London this rocketed to £248,000 - according to data from international estate-agent chain Hamptons International.

However, bear in mind that property prices, growth and yields can vary dramatically across regions, towns and even in the same street.

To help investigate the area you're considering investing in, try our area comparison tool, where you can find vital information about areas before you buy.

3. Lenders increase borrowing to older investors

We recently wrote about Santander extending its buy-to-let mortgage criteria to better suit older borrowers - but many other providers had already done the same.

Analysing the latest Moneyfacts data, we found that of the 2,151 buy-to-let products currently on the market, 52% of the deals have a maximum age at the end of the term of 85 or above, and 19% have no maximum age limit at all.

4. Mortgage rates falling due to Brexit uncertainty

Since 2016's EU referendum, financial advice website Moneyfacts data has shown the average rate on a fixed-rate buy-to-let mortgage has dropped by almost half a percent, which could be great news for potential investors.

DateAverage buy-to-let fixed rate
June 20163.71%
April 20193.26%

However, while fixed rates are currently low, costs could rise in the future if the Bank of England base rate increases from its current level of 0.75%.

As the terms and effects of Brexit are still unknown factors, it's hard to say whether interest rates will rise or fall - but any base-rate rises can result in mortgages becoming more expensive.

If the only income you're relying on is your pension, you may want to consider whether you'll still be able to afford a buy-to-let mortgage if this takes place.

Should you invest your pension in property?

While we've outlined a few reasons why the current market could present financial opportunities for older buy-to-let investors, letting a property is no longer a surefire way of making a return.

Buy-to-let investors are facing several challenges, such as mortgage interest tax relief cuts, the 3% buy-to-let stamp duty surcharge and the upcoming tenant fees ban which kicks in on 1 June.

All of these could lead to slimmer profit margins, possibly making you more vulnerable to losses.

David Blake, principal adviser at Which? Mortgage Advisers, says: 'As with any buy-to-let investment, it's really important investors have contingency funds in place in case the property isn't let for a period of time.'

There are a number of other factors to consider before investing your pension:

  • Will you end up with a hefty tax bill? In addition to having to pay tax on 75% of any pension funds you withdraw, added income could tip you into a higher income tax bracket, and you'll also have the likes of buy-to-let stamp dutyand capital gains tax to take into account. It's best to seek professional advice about how this all works.
  • What are the inheritance tax ramifications? Property counts towards your estate, and could mean a higher inheritance tax bill for your family if the value exceeds the £325,000 nil-rate band. Pensions, however, don't count towards your estate for inheritance tax purposes.
  • Will you manage the property yourself or through a letting agent? Buying, maintaining and selling property takes more time than contributing to a pension, but instructing a letting agent to do this for you could result in significant fees.

You should also get clued up on things such as landlord insurance, and other landlord responsibilities such as EPC rating rules, safety checks and maintenance.

Find out more:16 things buy-to-let landlords need to know in 2019