This summer, George Osborne delivered his revised Budget and announced significant changes affecting the pension sector and the Buy-to-Let (B2L) residential investment market. Those aged 55 years or older can now get their hands on a lump sum pension payment but before they can merrily skip off to their local estate agent, the Chancellor also announced that mortgage interest relief is restricted to the basic rate of income tax.
This means private residential landlords will now be treated like a business meaning they need to pay tax on their borrowings – the relief has decreased from 40 per cent to 20 per cent, in line with the basic rate of income tax. He has also restricted the 10 per cent ‘wear and tear’ deduction, which will only apply when maintenance/repair expenditure has occurred (from April 2016).
However, this wedge in the B2L market will be slowly phased in between 2017 and 2020.
Again, the hotly debated issue of residential rental income providing a better revenue stream than pension payments has reared its head. The Chancellor may have tried to off-set the influx of seniors cashing in their pension cheques as deposits on a rental property by curbing B2L tax incentives BUT this will do little to deter pensioners from leaning on the residential market as a better income stream.
The average retirement income was approximately £15,800 in 2014, that is, 15 per cent down on 2008’s income of £18,663. In short, pension income is steadily decreasing. However, between 1 April 2013 and 31 March 2014 the average rental income for a two-bedroom London property was £17,760 (£20,388 for the upper quartile). I’ve used London as an example because this is a large market for Colliers International. That means London property delivers an average income 12.4% better than pension schemes.
Now, in my mind, off-plan purchases provide a greater benefit if buyers can, or are willing to, wait 12-24 months for a rental income stream. This process typically involves a £2,500 reservation fee before contracts are exchanged in 28 days upon which a 10 per cent deposit is required. This means you are securing a property at today’s prices and don’t require a mortgage until six months from completion – at which time you can top up your deposit or sell it on. Selling on the property is gambling on the expectation that values have risen and you will at least get your money back. However, assuming that you complete, your yields are likely to be much stronger as rental values are likely to increase during this time.
My one caution is that pensioners should be aware there are a limited number of lenders who will provide B2L loans to over 55s. The Mortgage Works and Singaporean-based bank, United Overseas Bank, do have products tailored to this market.
So, with stronger income streams and better returns than pension funds are providing, especially with historically low interest rates, it is no wonder more and more people are ploughing their money into bricks and mortar investments.