Lending rules eased by banks have handed a lifeline to retiree landlords previously barred from buy-to-let investing.
Minimum income requirements, which specify buy-to-let borrowers must earn a certain level of income before qualifying for a loan, have been scrapped by around a quarter of lenders.
Last week, Accord Mortgages reduced its limit for buy-to-let customers from £25,000 to zero. The move will favour business owners, consultants and retired freelancers, and those with smaller pensions, who were previously prevented from obtaining a loan because they lacked the annual income to qualify.
Increasing numbers of the retired have focused on property to provide or supplement an income in retirement. Around 8pc of pensioners have withdrawn money from their workplace or private pension and invested it in property, according to the comparison website NerdWallet. Doing so enables investors to benefit from rising house prices and can provide a consistent stream of income in retirement.
According to analysis by Telegraph Money, a buy-to-let investor could have made around £35,000 more over the past five years than a stockmarket investor with a medium attitude to risk.
Property likely to yield greater returns than pension
The average house price in October 2016 was £217,411, according to lender Halifax. This would result in monthly payments of £735, if bought with a 40pc deposit and at the average mortgage rate at the time of 4.63pc. The average monthly rent for that year was £759, according to statistics aggregator Statista, adequately covering the monthly repayments.
On the other hand, an interest-only mortgage would cost the landlord £503 per month, allowing them to pocket £256 per month in rental income.
Yet today, the same property would be worth in the region of £270,027, £52,616 more than its original value. According to insurer Aviva, investing the same deposit in a medium-risk portfolio earning 4.5pc would have returned just £17,405 over the same period.
This means the buy-to-let investor would not only be around £35,211 better off, excluding tax and maintenance costs, but could also continue to benefit from further house price inflation in the future.
Experts, however, are urging caution regarding reliance on one type of investment for pension income. Insurer Prudential has warned that the risk involved in investing in no more than one asset class to fund retirement may have increased over the last five years.
Tax advantages of pensions vs property
The buy-to-let sector in now less attractive than five years ago due to government changes, which cumulatively have removed many of the tax advantages that landlords used to enjoy.
The greatest change affecting landlords over this period has been the gradual tapering and removal of mortgage interest tax relief. Previously, landlords could deduct mortgage expenses from their rental income to reduce their tax bill. This is no longer possible and landlords receive instead a tax credit based on 20pc of their interest payments.
The change means higher-rate taxpayers, who prior to the change in effect received 40pc tax relief on their mortgage payments, now pay more in tax. Under the new system, the requirement to declare income used to pay a mortgage has pushed some landlords into higher or additional tax brackets.
Landlord organisations contend this has forced a quarter of a million to sell up and quit the sector over the past five years. In contrast, investment returns within a pension are not subject to income tax.
There are additional tax implications to consider. Whereas pension investment returns are free from capital gains tax, this does not apply to buy-to-let property, although landlords can deduct purchase and sale costs.
And while defined contribution pensions can also be passed down without attracting inheritance tax, buy-to-let properties form part of a deceased landlord’s estate and are, therefore, subject to IHT.
Furthermore, if a pension holder dies before the age of 75, their beneficiaries are entitled to access their pot free of income tax, and can access funds at a marginal rate of tax, if the holder dies after 75. But this does not apply to income from buy-to-let properties, which is liable to the tax regardless of the landlord’s age at death.
