A new range of equity release products will allow landlords to access capital from their buy-to-let, but experts warn it’s a bad idea.
Landlords can now access cash locked up in their investments following the launch of buy-to-let equity release products.
Equity release schemes, sometimes known as “lifetime mortgages”, allow owners to borrow against their homes without having to make monthly repayments.
Instead, interest rolls up over the life of the plan, which is typically paid off on death with the sale of the property.
The cost of traditional equity release products has been plummeting in recent years.
In 2012, the average interest rate stood at 5.92%, according to equity release firm Key Retirement, but this has fallen to 3.94%.
This helps explain its surge in popularity: stats from the Equity Release Council show the amount of money released from properties by over 55s jumped 18% between the second quarters of 2016 and 2017.
And while equity release should only ever be seen as a last resort, it’s against this backdrop that a company has decided the time is right to target the buy-to-let brigade.
How it works
Launched by Retirement Advantage, there are three products to choose from as part of its Landlord Options range.
These can be taken out on multiple properties, provided they are worth between £70,000 and £6 million.
Any properties above this threshold are judged on a case-by-case basis.
Here’s a quick rundown of how each product works:
With Landlord Lifestyle, there are no interest payments to make. Instead, the interest rolls-up and is added to the mortgage each month.
The Landlord Interest Select product gives you the option of repaying some, or all, of the interest charged each month.
Finally, with Voluntary Select you can make a contribution of up to 10% of the initial loan amount each year without facing an early repayment charge.
Describing the products, Tom Evans, managing director at Retirement Advantage Equity Release, said: “These are exciting times for the equity release market, with growth at record levels.
“We have listened to customers and to advisers, and these new products will allow owners of buy to let properties greater ability to make the most of their property wealth to live the retirement they want.”
Are they worth going for?
As with mortgages, you pay a hefty premium for buy-to-let equity release compared to traditional products.
The table below highlights just how much more interest you can expect to be hit with (remember, the average rate in the residential sector is under 4%).
So are they worth going for? We asked Tony Gimple, founding director of tax & estate planning consultants Less Tax For Landlords, for his view.
“My gut feeling is this is more marketing hype than anything else – it also seems a waste of time if the property is already generating income.
“There is no direct tax consequence of the actual equity release.
“However, as with other interest charges, the interest costs would not be a fully allowable deduction unless the taxpayer was a 20% taxpayer, albeit the increase in debt against the property will reduce the eventual IHT exposure.
“Overall, there are far less restrictive ways for landlords to release capital in retirement, and we feel this is a really bad idea in commercial terms for property owners.”
What do you think? Should landlords ever consider an equity release product? Share your thoughts in the comments section below.