The launch of new buy-to-let equity release schemes from Retirement Advantage shows how this emerging financial services sector is positively looking to help innovate in the 55+ marketplace. This article focuses on how these re-introduced BTL lifetime mortgage plans can give a welcome boost to landlords who’ve recently been affected by changes in rental taxation and stamp duty.
The concept of taking equity release on rental properties isn’t new to the lifetime mortgage industry. Post economic downturn, now over a decade ago, NewLife Mortgages bravely launched a Landlord equity release scheme that tried to help breathe life back into an already depressed rental market.
This was a time of uncertainty with funding, falling house prices and overall gloom in the economy. The plan was simplistic in nature being of old school roll-up lifetime mortgage in nature, with little flexibility & higher interest rates of 7.25% MER, much higher than the rest of the market. Nevertheless, the NewLife Equity Release scheme did have brief take-up, before later being discontinued. Buy-to-let equity release and has been talked about frequently since, alas no lender has fulfilled its potential by taking research further, & actually re-launch equity release on buy-to-let property... until now!
On 21st August 2017 Retirement Advantage announced the launch of their version of buy-to-let equity release by introducing their ‘Landlord Options’ Lifetime Mortgage in conjunction with a Second Home proposition.
With a buy-to-let marketplace estimated to be currently worth over £250bn, landlords are frequently looking at options in finding the best mortgage deals to help fund their property portfolio. However, since the crash, (which many partly blame on BTL) this market has since remained tight in its lending criteria, particularly for those borrowing into retirement.
What is Buy-to-Let Equity Release?
Buy-to-let equity release helps landlords over the age of 55 release equity that’s tied up in their property portfolio, without having to sell it. This cash can then be put to better use; to either supplement pensions, buy new rental homes, or for tax mitigation purposes etc. The amount that can be borrowed is based on the age of the youngest homeowner, upon which the lifetime mortgage provider will then lend a percentage of the value of the property.
From there, the funds released will be charged a fixed rate of interest by the lender which is usually added to the loan & compounded for as long as the mortgage runs. Being a lifetime mortgage, this will be until the death of the last owner, unless its repaid earlier for alternative reasons. New plans offer greater flexibility than have traditionally been available by allowing repayments, either on a monthly or voluntary payment basis – see below.
How Can BTL Equity Release Plans Help Landlords?
Many people aged 55+ with 2nd properties being used for letting purposes, are relying on the rental income to help fund their retirement. If they sold the rental property, their income will subsequently be stemmed and this may not the ideal scenario. Additionally, should the property value have risen significantly since purchase, a capital gains tax penalty could apply, rendering previous benefits of renting nonsensical.
Let’s now look at many of the reasons why landlords would consider BTL equity release schemes.
Taxation – Capital Gains Tax
By deferring the sale of a rental property and instead taking a release of equity, a landlord would avoid any imminent capital gains tax (CGT) charge and be free to spend the released equity on whatever they choose. By then keeping the property until death, the heirs will possibly benefit from an escalation in the property value and the rule that no CGT is liable at the date of death, which is when the property is likely to be sold.
This is more significant for higher rate taxpayers. For instance, a higher rate taxpayer (HRT) who makes a £100,000 gain on a £250,000 buy to let home over a five-year period would face a CGT bill of almost £25,000 if it was sold during their lifetime. However, Retirement Advantage’s new BTL scheme takes advantage of the Revenue rule that profits are revalued at death. When people die and leave their assets to the family, there is no CGT to pay at the time. When the property is eventually sold, CGT is only based on the difference between the proceeds on subsequent sale, and the market value at the time of death. The higher-rate taxpayer could therefore pass the £250,000 property to the family CGT free. Before exploring this further, always seek tax advice from an authorised source.
Taxation – Inheritance Tax
The principle of equity release involves the roll-up of interest which compounds monthly, or yearly until the death of the last homeowner. Choosing the roll-up route, rather than any of the repayment routes, will understandably erode more of the equity in the property, dependent upon the original loan-to-value taken. This assumes that house price inflation doesn’t outstrip the rate of roll-up. Ending up with less equity will ultimately reduce the IHT bill.
For people with the prospect of a future inheritance bill, taking a release of equity can therefore reduce the inheritance tax liability, as long as the funds aren’t merely left on account, or within the estate. Therefore, buy-to-let equity releasers could use these funds for gifting purposes, for which mainstream equity release schemes are already being utilised. This can be gift to children for house deposit purposes, or even buying them an investment property for rental purposes. Again, always seek tax advice before undertaking.
Boosting Retirement Income
Another perk for buy-to-let investors taking equity release is the ability to maintain the rental income in full, when not having to sell up. Should inheritance not be so much of a concern for landlords, then by taking equity release on a rented property and allowing the interest to roll-up, this will not affect their budget in retirement. The cash released can then be used for other purposes as detailed later.
This Interest charged on the BTL lifetime mortgage can still be offset against the tax charged to the landlord, even though the interest is being rolled-up. As property investors may be aware, this offsetting of tax relief has started reducing April 2017 & will be withdrawn completely by the 2020/21 tax year. Hence, BTL investors will only benefit from this for a few more years.
Interest-Only Buy-to-Let Mortgages
We have seen a tightening of lending criteria by BTL Mortgage providers as they enforce a more restrictive lending policy post-crash. Landlords with earlier buy-to-let mortgages and underwritten with more relaxed criteria, are finding the ability to renew these mortgages somewhat difficult. BTL lenders are not extending the term in such circumstances, using higher stress testing & as such the only solution could be to sell & possibly incur capital gains tax. An awkward predicament.
However, the new Retirement Advantage Landlord Options Plan can assist BTL investors remortgage away from such lenders, should their loan fit the new criteria. This will enable them to keep the property, maintain their income & any potential future property gains, plus continue paying interest-only should that be their preference.
Whenever an elderly person needs to enter long term care an assessment will be made on who pays for the care costs, based on the assets of the individual. When these total above the threshold where assistance from the local authority ceases, the family are then responsible for costs. Making the choice of whether to remain at home, move into care, or stay with relatives, will be a discussion for the family. However, one way to cover the costs of care would be to sell the property; the difficulty being where to invest the sale proceeds with returns currently so low?
An alternative solution could exist. When moving out, the property could be converted to buy-to-let with an assured shorthold tenancy agreement drafted between the owner (assuming they have mental capacity) and the new tenants. This monthly rental income can then be used towards helping fund the ongoing long-term care costs, plus if any additional monies are required, then buy-to-let equity release schemes can be considered to raise additional lump sum amounts. This would help keep an asset that may possibly continue to increase in value with family members managing the rental property & associated requirements.
Although I've highlighted some of the more technical reasons where Landlord equity release schemes can benefit property investors, there are still the traditional reasons for releasing equity on a rental property. This could be for one’s own personal & financial reasons such as property improvements (residential & BTL), buy another property, holidays, new car/caravan and repaying debts etc.
Qualification Rules for the Landlord Options Plan for Buy-to-Letters
Essentially, the Landlord Options equity release plan will take security over the Buy to Let property. The landlord(s), who must be private individual(s) & not a limited company, must be over the age of 55 with the youngest under the age of 90. The plan will run for the lifetime of the individual & repaid upon death.
The rental property concerned must have a minimum valuation of £70,000 and a maximum of £6million and be located within England, Wales & Scotland. The minimum release available is just £10,000 with the maximum BTL equity release amounting to £750,000 giving buy-to-let investors plenty of scope.
A real positive for Landlords is that Retirement Advantage have kept their 8-year fixed early repayment charges (ERCs) for these BTL products. Between 0-5 years the ERC’s are 5% of the initial loan, years 6-8 are 3% and no penalties exist thereafter. Interest rates at launch start from 6.07% MER (6.5% APR) and the products come with a FREE unlimited valuation offer at launch.
The property itself must one that the owner doesn’t occupy and is let out on an Assured Shorthold Tenancy agreement with not more than 12 months period in place. Buy to let landlords do need to follow the letting criteria of the Retirement Advantage Landlord scheme carefully.
In summary, the main conditions are as follows:
- Property can only be for a family dwelling purposes and no Houses in Multiple Occupancy (HMO’s)
- Deposits taken from tenants must be protected in a Government authorised deposit scheme
- Relevant certificates for gas, electric & appliances have been checked & approved 12 months prior
- If a landlord licence is required, a copy must be evidenced prior to completion
- Tenancy’s not permitted are – Housing Association, University, Students, Council, Family & relations, DSS tenants
For a list of full property criteria, please contact the Equity Release Supermarket team on 0800 802 1051.
What Retirement Advantage Landlord Plans Are Available?
Retirement Advantage Landlord Options plan comes in three versions, which can be selected by the applicant dependent upon their future objectives for their Buy to Let property.
- Landlord Lifestyle Options - provides a simple one-off cash lump sum with no requirement to make any repayments. The interest can simply roll-up on a monthly basis over the lifetime of the plan. Partial payments can still be made; however, they could incur an early repayment charge (see later).
- Landlord Interest Select Options – landlords can choose to repay some or all of the interest on a monthly commitment basis over a minimum period of 5 years. They can choose to repay between 50%-100% of the monthly interest amount charged to help control the future balance. Unlike BTL mortgages, these plans require NO proof of income to support repayments and affordability. Interest payments can stop at anytime in the future and then be converted to a roll-up basis.
- Landlord Voluntary Select Options – another repayment plan, albeit with greater flexibility in that the landlord can choose to make a voluntary contribution of upto 10% of the original loan advanced each year with NO penalty. The minimum payment is just £50 which can begin immediately after inception, with no cap on the number of payments made. Payments can be easily made by cheque, standing order, debit card or bank transfer.
How Much Will Retirement Advantage Lend?
The calculation on how much Retirement Advantage will lend on their three Buy-to-Let Lifetime mortgages is the same across its range. Upon launch & with a conservative initial approach, the loans will be based on the age of the youngest applicant and using the property valuation. At age 55, the maximum loan is 9% of the property value, rising to 19% by 65, 29% at age 75 with the maximum LTV being 34% from age 80-90. This may be subject to change once the plan has established itself further, hence please check with the team for the latest maximum buy-to-let equity release calculation on FREEPHONE 0800 802 1051.
Retirement Advantage are members of the Equity Release Council, however as this equity release mortgage is not secured on a main residence then the Landlord Option Plans aren’t covered by the Council. Therefore, the right to remain in the property for life, or until moved into long-term care do not apply as these standards are designed to protect you only in a main residence. Also, the mortgage is not portable to another property.
Nevertheless, important safeguards are still included under the plans such as the fixed lifetime interest rate and No-Negative Equity Guarantee. These Landlord plans being Buy-to-Let are classed as unregulated products. However, both the lender & Equity Release Supermarket will provide information in the same format as a regulated equity release, such as your Key Facts Illustration and Financial Planning Report.
Retirement Advantage BTL Lifetime Mortgage Summary
It’s great to see further innovation for the equity release market, but also for the over 55 age group who are constantly battling with ways of improving their lifestyle. This positive move from Retirement Advantage is undoubtedly the start of a period where equity release schemes will become more mainstream and developed to grow and improve people’s standard of living in retirement.
For the latest rates please follow this link to our Equity Release Comparison Table
If you wish to discuss any aspect of this Buy to Let Equity Release article please call the Equity Release Supermarket team on FREEPHONE 0800 783 9652 or email [email protected].