Buy To Let More Popular Than Traditional Pension Saving
There has been a lot of editorial commentary in the media focusing on the surge in UK Buy To Let property investment over recent weeks.
There are numerous reports that the total value of properties owned by 2.5 Million buy-to-let investors is fast approaching the total amassed in workers’ pension schemes built up over decades of employment.
The Telegraph reckons that a total of £1.25 Trillion (GBP) has been invested in buy to let property and this figure is still increasing compared to £1.6 Trillion (GBP) that has been invested in pensions.
Changes to pension legislation announced by Chancellor George Osborne in the Spring 2014 budget, could see more money taken out of pensions and put into the UK’s Buy To Let (BTL) market.However, many landlords are not yet prepared for interest rate rises or increases in tax liabilities. It is alleged that a high proportion of landlords are not earning enough rental income every month to survive even a modest increase in buy to let mortgage rates.
Specialist Buy To Let mortgage lender, BM Solutions, reckons that:
- One in three UK landlords do not have an exit strategy
- One in Three landlords do not have a financial or business plan.
- One in three landlords had only become a landlord in the past three years.
- One in five landlords did not know the true rental yield of their investment property.
Traditional pension saving is still quite complex and was becoming unpopular with many workers before the Chancellor announced the changes to the way pensions would be handled from 2015 onwards, enabling savers to spend pension proceeds freely.
The Buy To Let phenomenon is still growing at its fastest rate ever, spurred by rising rents and house prices and cheap mortgages and the Government’s recent pension changes are expected to add to the boom.
The trend is causing concern among commentators, not least because many landlords are said to be failing to plan or prepare for setbacks such as interest rate increases and tax liabilities.
Back in April, the Telegraph warned that a high proportion of UK buy To Let landlords are not earning enough monthly rental income to survive even a modest increase in mortgage rates.
Research by Platinum Portfolio Partners (PPP) suggests that many landlords have drifted into the rental property market because of struggling to sell residential property on the open market and have turned to the UK private rental sector to offset property running costs, including repairs, maintenance and mortgage payments.
- 75% of UK PRS landlords own just one rental property.
- 20% of UK PRS landlords have 3 or more properties
- Only 1% of UK PRS landlords have 15 properties or more
There are still a high proportion of accidental landlords operating in the UK’s private rental sector, (PRS), who didn’t intentionally set out to invest in buy-to-let, with 41% of accidental landlords letting out a property they once lived in and 13% renting out property that they had inherited.
PPP’s research, based on interviews with 1,000 UK PRS landlords, found that one in five did not know the rental yield of their investment, with almost as many not knowing even how to calculate this figure.
More alarmingly, one in three property owners had only become a landlord within the last three years.
Britain’s biggest buy to let mortgage lender, BM Solutions, agreed with the research data, after they too conducted research among full time professional landlords with an average of 8 properties in their portfolio, generating annual rents of £60,000 (GBP). BM’s research discovered that 75% of PRS landlords use interest-only buy-to-let mortgages to operate their rental property businesses with no payments put towards reducing the mortgage debt, and one in three UK landlords did not have an exit strategy or a financial / business plan in place to allow for exit from the market.
Failure to plan an exit strategy can leave PRS landlords exposed to rising mortgage costs such as a rise in interest rates resulting in higher mortgage payments or, more importantly, paying off the mortgage itself at the end of the term.
For the best yields, buy-to-let property investors should focus their investment carefully on the more niche areas of the UK’s private rented sector, such as Houses of Multiple Occupancy (HMO’s), where rental yields are strongest.
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