The relatively early days of the UK buy-to-let market saw many people believe this was "easy money". As the right to buy scheme saw many council houses leaving the rental market, this left a vacuum that private landlords filled. While the market today is more mature, there are still plenty of opportunities to lock in attractive long-term rental yields with potential for capital appreciation.
Even though the regulatory burden has tightened and transaction costs have increased, forcing some private investors to leave the market, buy-to-let investment is still worth considering. Many homeowners over 50 have significant equity in their principal residence and a private pension fund. Buy-to-let might be a way to maximise returns and provide additional income in the future.
What is buy-to-let?
The term buy-to-let landlord refers to those buying properties specifically to rent out. If you are looking for a buy-to-let mortgage, you won't be short of offers. Competition is intense in the buy-to-let mortgage lenders market, creating attractive funding deals for property investors.
While there are numerous issues to consider, like stamp duty, interest rates, capital gains and rental income, rental property is attracting the attention of more over 50s than ever before.
Is buy-to-let still popular?
Recently, we saw the government targeting the private rental sector and buy-to-let market to raise additional finance. This resonated with voters, with many under the misapprehension that all private landlords were "rich". While some private landlords have exited the sector over the last few years, others have stepped forward with a more long-term investment horizon.
In many ways, a mix of regular rental income and potential for long-term capital appreciation is ideal for those over 50, facing retirement and a reduction in their employment income. While the private rental sector (PRS) continually adapts to changing conditions, the long-term signs are positive.
How big is the private rental sector?
Shawbrook data shows that the PRS contracted due to the pandemic over the last couple of years - the market fell by 2.6% in the 12 months to March 2021. However, there were still 4.8 million rental properties, accounting for 17% of all households in England, Scotland and Wales. Interestingly, even with the pandemic, and recent regulatory changes, the number of private rental properties in the UK is still above the number in 2015.
Interestingly, while the number of properties in the private rental sector fell slightly, the combined value increased by 5.8% during the 12 months to December 2020. As a result, the industry is worth nearly £1.4 trillion - up from £1.175 trillion in January 2015.
Is growth in buy-to-let property values uniform across the country?
When comparing and contrasting different parts of the UK, you will notice that rental yields and capital appreciation can differ markedly. For example, in the 12 months to December 2020, the average buy-to-let property increased in value by 5.6% to £258,900. However, if we drill down a little deeper, London reported capital appreciation of just 2.6%. In comparison, Wales saw an 11.2% increase in private rental property values. The performance of other areas in the UK is illustrated in the table below, which uses data from a recent Shawbrook survey.
Buy-to-let property price growth in 12 months to December 2020
Change In Value
East of England
Yorkshire and the Humber
Buy to mortgages as a percentage of the overall market
While the buy to let mortgage market is significant in size, the overall market is dominated by first-time buyers, regulated remortgages and those moving home. Between 2002 and 2019, the BTL mortgage market experienced periods of growth and contraction - illustrated in the table below using data from UK Finance:
BTL house purchase/BTL remortgage market
However, due to relatively low-interest rates over recent years, there has been a significant increase in those looking to remortgage their buy to let properties.
The massive liquidity in the overall buy-to-let mortgage market has created a level of competition that provides attractive mortgage rates. As the buy-to-let market adapts to both regulatory and cost changes, many experts are still predicting steady long-term growth.
Homeownership, social renters and private rental
As we touched on above, there have been significant changes to the private rental regulations and several new costs introduced to the fray. While some private landlords have withdrawn from the market, it is essential to look at the overall picture. The table below, using data from Brookings.edu, shows the considerable changes in the make-up of the UK housing market over the years.
|Year||Private Renters||Homeowners||Social Renters|
You can see from the table that private landlords were very much in control in the 1920s. However, as property became more affordable, there was a gradual reduction in private rental numbers and an increase in homeownership. The dip in social housing came about because of the right to buy scheme, which saw many councils slash the number of properties on their books. In recent years, there has been a recovery in housing association properties. Still, many local authorities have yet to replace the housing stock lost in the 1980s and 1990s.
As the cost of property continues to rise, with interest rates already turning up from their historic lows, the affordability factor will become more prevalent. With more first time buyers likely to fail their mortgage affordability test, many experts believe the private rental sector will show significant growth in the short to medium-term.
What are the yields available on buy-to-let property?
If you're considering an investment in the private rental market, it is vital to consider rental yields and potential capital appreciation. In this section, we will look at the average rental yields across the UK as of December 2020. You will find a reverse relationship between rental yields and the potential for capital appreciation. In simple terms, the higher the rental yield, the less capital growth is expected, and vice versa.
This is demonstrated in the following table using data from a recent Inventorybase.co.uk survey.
Rental yield table December 2020
It will come as no surprise to learn that the more affluent areas of the UK, the south-east, south-west, east and London tend to produce the lowest rental yields. While we did see a blip due to the Covid pandemic, with a short-term trend seeing London homeowners selling up to buy elsewhere, this is reversing. Historically, London has always provided some of the lowest rental yields in the country but the highest capital appreciation.
We have added another table showing rental rates (source: Inventorybase.co.uk) as a percentage of income in different areas of the UK between 2019 and 2020. This shows how the London private rental market is stretched, with more than 50% of monthly income spent on rent alone. So unless we see significant wage rises in London, there would appear to be limited scope for a short term increase in rental yields.
Change in rent as a percentage of income 2019-2020
|Region||Rent as % of monthly income 2019||Rent as % of monthly income 2020|
East of England
At first glance, some of the rental yields available across the UK may seem relatively low. Still, we must consider these in tandem with interest rates, savings rates and mortgage rates. So in relative terms, there is still value. However, with inflation currently running at more than 7%, it will be challenging to maintain your relative spending power in the short term. However, the added fillip from the buy-to-let market is the potential for long-term capital appreciation.
Are there any restrictions on buy-to-let investment?
Assuming you can raise the required funds, there are no real restrictions on buy-to-let investments. However, there are several regulatory changes that you should be aware of.
Electric safety standards
All private rental properties must abide by new electrical safety regulations as part of a government drive to improve safety.
Right to rent rules
In light of Brexit and other regulatory changes, an individual's immigration status will dictate their right to rent instead of their nationality.
Notice periods and eviction notices
Recently there have been significant changes to the notice and eviction process with tenant protection tightening. More changes will be coming over the next couple of years; therefore, it is essential to be aware of your legal obligations and protections.
In April 2016, the UK government introduced an additional stamp duty charge for buy-to-let investors and private landlords. This means that buy-to-let investments will attract an additional charge of three percentage points over and above the standard rate for each band.
Keeping track of regulatory changes
It is fair to say we have seen significant changes in the private rental market recently. While some would argue the bulk of the changes have already occurred, further adjustments will come into play over the next few years. Therefore, you must keep up-to-date if you want to enter the private rental market as a buy-to-let investor.
To ensure that you are up to speed with tenancy regulations, tax relief and more, it may be worthwhile to employ the services of letting agents. They should have their finger on the pulse regarding changing rules and legal obligations in the future. They can also advise on things like landlord insurance and provide information so you can complete your income tax returns. Due to potential long term relationships, agent fees can be competitive.
Raising funds for buy-to-let investment
So, you have decided to enter the private rental market and have your eye on a rental property. The next step is to raise funds in the most efficient manner possible. Thankfully, there are several options due to massive competition in this area.
There are specific buy-to-let mortgages available based on your regular income and the rental income that the property may generate. However, unlike the heydays of the 1980s and 1990s, 100% buy-to-let mortgages are no more. Consequently, at best, you may be able to obtain a buy-to-let mortgage with a loan to value (LTV) ratio of 85%. This means that on a £200,000 property, you would need to find £30,000 for the deposit. Comparing and contrasting buy-to-let mortgage interest rates is essential as lenders might charge you a higher rate than a traditional mortgage.
Even though many of us are extending our working lives beyond the traditional retirement age, you may have tax-free income from your pension to consider. In some cases, this may be enough to cover the deposit on a buy-to-let property or at least reduce the additional funds you need to raise. It is vital to consider your financial circumstances at the time, expected changes in the future and whether you can afford to fund the deposit. Using a residential mortgage to acquire a buy-to-let investment is not allowed by mortgage lenders.
- The buy-to-let mortgage affordability test will take into account rental income and your regular income
- A competitive market has encouraged competitive buy-to-let mortgage interest rates
- The historic high buy-to-let mortgage LTV ratios of years gone by are no more. At the moment, the best you can hope for would be 85%
- Mortgage funded buy-to-let investments would require a deposit of at least 15%
As you can see from the Nationwide House Price Index, there has been a considerable increase in the value of UK homes over the last 70 years. As recently as 2008, the average property in the UK was valued at around £150,000 and is now more than £250,000. With this exceptional price growth, many homeowners are sitting on significant equity.
While the long-term performance of UK house prices has been impressive, there is no guarantee of future performance. Consequently, many homeowners are considering remortgaging an element of their primary residence to raise funds to start their property portfolio. This is especially relevant to those over 50, who may have paid off their mortgage but are entering a period of reduced monthly income.
Assuming the rental yield and your existing income would support a buy-to-let mortgage and a relatively small equity release procedure, you could raise the required deposit from your existing property. For many people, this offers a welcome opportunity to increase their regular income and also the potential for long-term capital appreciation.
- Opportunity to release equity and increase long-term income and capital appreciation
- May only need to raise a relatively small amount for a buy-to-let mortgage deposit
- Homeowners may be able to release more equity to reduce the buy-to-let mortgage required
- Still required to pass the mortgage affordability test
- No guarantee of regular long-term income and capital appreciation
Due to the mortgage affordability test, which comes with a traditional mortgage, buy-to-let mortgages and remortgages, many investors over 50 have switched their attention elsewhere. This brings the likes of lifetime mortgages that do not require a mortgage affordability test into play.
This type of financial tool allows you to release equity from your property without making regular monthly repayments. Instead, the monthly interest is rolled up and repaid at the end of the term with the initial mortgage capital. As a result, there are no regular repayments, so there is no need for a mortgage affordability test. However, the LTV ratios tend to vary between 45% and 58% due to interest on rolled-up interest and age. There is also a minimum age limit of 55 on lifetime mortgages.
A lifetime mortgage is repaid upon the homeowner's death or move into full-time care. Consequently, raising funds from this type of mortgage to reinvest into a buy-to-let investment may be a viable option for many people approaching retirement.
- As there are no regular repayments, there is no need for a mortgage affordability test
- Initial capital and interest are only repaid on death or move into full-time care
- Opportunity to fund private rental property portfolio
- Positive impact on cash flow
- Borrowers are protected from potential negative equity situations
- The LTV ratio can be relatively low, dependent upon age
- Interest on rolled-up interest can mount up over the years
- Headline interest rates tend to be higher than those for traditional mortgages
Home reversion scheme
Another option for those over 50 looking to raise capital is a home reversion scheme. This involves selling a percentage of your property to an investor. It also guarantees you will live rent-free in the property for the rest of your life or until you move into full-time care. However, there are several issues to be aware of regarding home reversion schemes.
As you are only selling part of your own home, you may only receive between 20% and 60% of the market value. So, for example, if your property was worth £200,000 and you were looking to sell 50%, the market value would be £100,000. However, you would only receive £20,000 - £60,000 under the home reversion scheme.
It may seem strange that anybody would consider such a scheme on the surface. However, when you dig deeper, there are other issues to consider. The fact that you will live rent-free in the property for anything up to 40 or 50 years has value. You would also benefit from any capital appreciation on your remaining share of the property. Home reversion schemes can be a valuable means of raising capital relatively quickly. Still, there are pros and cons to consider.
With a home reversion scheme, the proceeds will be shared on a pro-rata basis when the property is sold.
- Means of raising capital relatively quickly
- You would live rent-free until death or move into full-time care
- No mortgage payments, as you are selling part of your property to an investor
- Positive impact on cash flow
- Option to release more equity further down the line
- Investor valuation likely to be significantly below market value
- Potential reduction in the value of your estate/funds available for beneficiaries
- Possible restrictions when moving home
- May create a capital gains tax (CGT) liability
Over the years, as you approach retirement, you may find that you have built up a substantial pension fund. When eligible, under current regulations, you can take out up to 25% of your pension fund as a tax-free cash lump sum. So, for example, on a pension fund valued at £500,000, this would equate to a tax-free payment of £125,000 with the potential to draw down additional regular income.
In theory, there is the potential to acquire a buy-to-let property outright with your tax-free cash lump sum. For more modest pension funds, an element of the tax-free lump sum could be used to cover a deposit on a buy-to-let mortgage. Monthly pension fund withdrawals could help towards mortgage repayments, in tandem with rental and other regular income. While these decisions would need to consider your short, medium and long-term financial requirements, the use of pension fund income offers an exciting opportunity.
It is worth remembering that under current regulations, you cannot invest pension funds directly into residential property. Whether this will change in due course remains to be seen, but this is where we stand at the moment.
- Tax-free cash lump sum could go towards a buy-to-let property purchase
- Regular drawdown from your pension may assist with mortgage repayments
- Valuable means of making your pension funds "work for you”
- Potential to create a long-term income stream and possible capital appreciation
- Current regulations do not allow direct investment of property funds into residential property
- Relatively modest pension funds may not be enough to fund a buy-to-let mortgage or property purchase
- If you require funds at short notice, it can take time to liquidate property assets
Investments or savings
While there is no guarantee of future income or capital appreciation, historically, investment in residential property has proven to be relatively productive. As a result, you may wish to consider switching your investments and savings into buy-to-let property. Still, you should take professional financial advice (and talk to estate agents) before doing so. Diversification is a vital element of any investment portfolio. However, you must carry it out with consideration for your financial situation.
On a more straightforward note, average rental yields across the UK can vary between 3% and more than 5%. This compares extremely favourably to current savings rates, which are minimal at best and zero at worst. While this will change as and when interest rates rise, at this moment in time, the gap between potential rental income streams and savings interest is enormous.
- Buy-to-let assets offer an opportunity to diversify your investment portfolio
- Opportunity to create a long-term income stream as well as capital appreciation
- Historically, long-term investment in property has provided steady returns, but there is no guarantee of future performance
- Property investments may take time to liquidate if you require funds at short notice
- Income and capital appreciation are not guaranteed
As someone over 50 years of age, there are numerous ways in which you may be able to raise capital to fund a venture into the buy-to-let market. Considering your overall financial situation, the potential pros and cons, and returns on individual asset classes are essential. While historically, residential property has performed well and created regular rental income streams, nothing is guaranteed.
Buy-to-let is still worth considering
When considering a buy-to-let investment and how to raise funds, you need to think about both income and potential capital appreciation going forward. For example, there is a vast chasm when comparing returns on savings accounts to possible buy-to-let income streams and capital appreciation. Therefore, while it is essential to diversify your investments to reduce specific risks, you must do this while considering your capital requirements for the future.
Some experts have "called the top" of the buy-to-let market, and some investors have recently left the arena. However, with careful research, there are still opportunities to create long-term income streams and potential capital appreciation. The attractions are more significant for many over 50s looking to rebalance their regular income as we advance. They may have savings, equity in a property or pension income they can use to invest. Yes, the buy-to-let market has attracted new regulations and increased running costs, but there is still potential for those with a long-term mindset.
Whatever type of property you are looking for, you must research the right property funding deal for you. Mortgage advisers can provide information on the best mortgage deal for your situation. There are also online mortgage calculators that will give you an idea of the potential funds available.