Buy to Let

Buy-to-let equity release: no longer the ‘product of last resort’

Buy-to-let equity release: no longer the ‘product of last resort’

Stuart Wilson

Later Life Academy & Equity Release Club

Buy-to-let landlords might not seem the obvious choice for an equity release product solution but, given the changes in the environment they face, one can see the potential for growing demand.

In the world of personal finance there’s always an ongoing debate about the merits (or otherwise) of equity release and whether there are other options more appropriate for the needs of consumers. You’ll be familiar with the term ‘product of last resort’ as I believe the FSA once dubbed equity release however I think it’s fair to say we’ve moved on significantly since then. Certainly the market has shifted as have the products that are now available, including those that allow the borrower to drawdown plus pay some or all of the interest.

There will however always be some – and I include advisers within this – who will have a nagging doubt about equity release. I tend to find these type of views are couched in the market of 15/20/25 years ago rather than any appraisal of the solutions today’s products can offer, however they exist and will often be transferred to customers. Perhaps some of the worst culprits are family solicitors who, when they get involved, decide they’re in a far better position to provide financial advice than those who actually have the qualifications and experience to do so.

You can also come up against such views – although less so these days – in the mainstream media and, in that respect, the sector can always seem like its fighting its own history, even if that marketplace (and the products it produced) are long gone. That ‘product of last resort’ charge can still be seen to be effective and it will be used to dissuade those who might, at the very least, be considering using equity release. ‘Why not downsize instead?’ they often ask, ignoring the significant costs involved in such a move, the impact of high house prices, the lack of supply, and the fact that many people in later life simply don’t want to leave the family home but need the money for all manner of reasons.

Up until very recently, it’s been the residential housing market that equity release has achieved the vast percentage of its growth in, and given the underlying demographics and economic circumstances this is unlikely to change. However, it’s been interesting to see equity release increasingly mentioned within the buy-to-let space, for example, amidst a more turbulent market for landlords. One, I suspect, that’s going to become ever more complex and uncertain when the PRA introduces its portfolio landlord underwriting requirements for lenders at the end of September.

Buy-to-let landlords might not seem the obvious choice for an equity release product solution but, given the changes in the environment they face, one can see the potential for growing demand. It’s not just those portfolio landlord underwriting changes – which will deliver a much more involved and longer process to secure funds – but it’s the previous set of changes introduced at the start of the year, the mortgage interest tax relief phased-in changes, plus of course the 3% extra surcharge on stamp duty for those purchasing additional properties which has now been in existence for the last 18 months.

On their own they would have had a big impact but cumulatively they certainly put pressure on landlords specifically their ability to make decent profit, at a time when house price increases have also slowed down significantly. There have been warnings that a large number of existing landlords, particularly those who we might deem ‘amateur’ or ‘dinner party’ with just one or two properties to their name, are much more likely to sell up and leave the private rental sector completely.

However, this is where an equity release option could be utilised in order to provide landlords with a tax-free cash release to do with what they wish, and rather importantly it enables them to keep hold of the property over a longer period, in order to keep benefiting from the rental income and to take advantage of any future house price growth. Also, given the likelihood of a much tougher lending environment for landlords, the equity release products available for buy-to-let come with no affordability checks, can be used across an entire portfolio, plus as mentioned previously allow borrowers to service some or all of the interest and allow 10% of the loan to be paid each year without an ERC having to be paid.

Equity release for buy-to-let properties is not necessarily a new thing – we’ve seen these types of products before – however what is different is the environment that landlords now find themselves in. I wouldn’t go so far as to say they have been viewed as ‘public enemy number one’ but certainly there has been a feeling in political circles that greater levels of buy-to-let investment have curbed the ability of other homeowners to either get on the ladder or move up it. The new regulation and stamp duty changes were designed to move property away from the private rental sector back into residential homeownership – the problem is that most landlords don’t wish to do this and therefore we might well see more take-up of equity release in order to allow them to keep hold of portfolios and continue to benefit from the clear advantages that come with property investment.

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