Buy to Let property- An Alternative Pension Idea
Why become a landlord in the first place? – until fairly recently, the number of private individuals, who became landlords was very small, buying property to rent was seen as the preserve of professional landlords and persons who were sufficiently wealthy to pay sizable deposits towards commercial style mortgages. The modern style, buy to let mortgage, wasn’t available and the possibility of purchasing property as a means of funding a retirement income, did not occur to most people. The infrastructure of loans, advice, information and hype was simply non existent.
However, a number of factors came together to make buy to let a viable alternative to the traditional pension and certainly the loss of confidence in the pension & equity markets was one of the principle reasons that individuals started to look around for viable alternatives to fund a retirement income. In general, Britons, are not that adept at saving for their futures, as recently as 2005, it was noted there was at least a 57 billion pound shortfall, in the amount of savings required. This situation was made worse by the fact that many people were seeing reductions in their pension pots and warning notices being issued about the value of low cost endowment policies, a product designed when inflation was running at a lot higher rate than now. The governments recommendation is that everyone must work longer and not retire at such an early age and to seek alternatives to save for the future. It is clear, that any government, of what ever political persuasion, can not be relied upon to fund a state pension. There will not be enough money to pay for an aging an increasingly more healthy population and thus the only alternative is to look after yourself.
Until recently, the pension, either company or private was seen as the main way of saving for the future. However, pensions have become very unpopular, below are some of the main reasons why.
- A good number of people no longer trust pension funds to handle their money, there has been a loss of confidence in this sector, although some of the bad press is clearly not deserved. Many workers, simply don’t trust handing over a proportion of their salary each month.
- Pensions have been delivering poor returns, occupational schemes have often failed to pay out the expected amount. The declining equity markets have not helped and dividends are either being cut or taxed and can no longer be relied upon.
- The current general perception, is that pensions provide a poor return for the money that is locked up inside of them.
- There is general confusion relating to the numerous schemes available, also the tax laws keep changing, this ‘moving of the goal posts’ makes some people believe, there savings are not safe.
- Pensions are seen as being very inflexible, one very off putting feature is that the saved pot of money cannot be passed on to children for example. Also, there are certain age restrictions when you can access the money. These makes many people feel, it’s no longer their money.
- The amount you receive is often linked to the current state of the equity markets. These have proved to be quite volatile in recent years. This has created an air of uncertainty amongst investors.
You could say that Buy to let, was born out of necessity, it seemed to arrive at the time it was most needed. It didn’t take too long for people and advisors to realise that here was a really flexible way of saving linked to property purchase with bricks & mortar considered a more stable form of investment. Also, the very notion that some one else would be paying for your investment was very appealing.
Buy to Let History – there have always been professional landlords, besides these, you have people that own second homes or holiday homes or who have simply inherited property that they have decided not to sell. Although we are seen as a nation of homeowners, there is also a great demand in the United Kingdom for rented property. The first shoots of the Buy to Let explosion were sown in 1980 when there was an important change in legislation. In this year, the Housing act allowed the ‘right to buy’ but also introduced a mechanism for landlords to regain control of a property at the end of a tenancy agreement. The Housing Act 1988 also brought in the Assured Short Hold Tenant agreement which outlined certain rights of both parties. This agreement, provided a much needed confidence boost to any potential landlord who perhaps had been put off by the many pitfalls of dealing with tenants. In 1992 the government introduced the” rent a room” initiative, another pointer to the fact that the government was actively trying to encourage more people to invest in property for rental purposes.
It wasn’t too long before mortgage lenders began to respond to these initiatives and soon a flurry of buy to let products started to appear on the market with far more attractive terms and conditions than had ever been seen before. The new legislation was seen as a backbone to a form of lending that previously had been viewed as far more riskier than your traditional owner occupied risk. As more and more buy to let products poured on to the market, and more and more lenders became interested, the pricing became more competitive and rates charged almost mirrored standard mortgage loans. Deposits became smaller and the amount of money on offer increased. Other restrictions became relaxed and soon new landlords began buying property at record levels. This upsurge in property interest, resulted in fairly steep price increases. The knock on effect of this, was that it was harder for first time buyers to get a foot on the property ladder, thus leading to an increased demand in the need for rental property. This catch 22 situation certainly helped to fuel the buy to let boom.
As well as the above initiatives, social and economic changes, has lead to increased need for rented property. These changes have led to the enduring demand for buy to let properties in the United Kingdom. There are many reasons why the United Kingdom, needs more property to rent including the following;
- The government has failed to deliver on it’s promise of creating new homes in the United Kingdom, also recently designated sites, many on floodplains, are proving to be not suitable, the recent economic crisis in the United Kingdom has also led to a slow down in new property construction. The Government have also pursued a’Brownfield” housing policy that has also prevented many house builders from building on more desirable greenbelt land to meet the increased demand. At the present moment, the United Kingdom is not able to supply enough homes to house it’s aging and changing population. Patently, the current economic crisis can only lead to the conclusion that this increased demand will not be met. Local authorities are also saddled with bureaucratic planning departments, which can lead to long delays in site approval. Recently, however, it has been noted that many people, faced with the burden off stamp duty, and associated moving costs, are simply deciding to extend the property they are living in, and some local authorities, in many cases have relaxed the rules relating to home improvements.
- Socially, the United Kingdom is a changing country, there is no longer the same social stigma attached to being either single or divorced, many people are now shunning married life and prefer to live on their own. There has also been a marked increase in the number off one parent families. This situation has led to a large increase in the current number of smaller style buildings, in particular flats and blocks of flats.One-person households, [particularly career minded females] have increased by over one million in the last 15 years. Interestingly, of the extra properties to meet demand by 2017, 80% will be needed by single persons. It is estimated that by 2025,at least one quarter of all households will be a single person entity.
- There is an increased need for student accommodation, universities do not provide enough on campus accommodation to accommodate for the increase in number of students now attending college and university. There has never been an adequate supply of university accommodation and until recently, many students were forced to seek locally sourced property from private landlords. Many parents are now choosing to purchase property, near a university so as their children can use it for the duration of their education. These parents are also making rooms in the property available to other students to help fund the mortgage payments. When the property is no longer required by a family member, often it is kept on and simply be rented to new students. Many investors will also seen the merits of renting property to students, there is always strong demand and because of the strength of the assured short hold tenancy agreement, property is now more respected by occupiers than it was 20 years ago. This trend is likely to continue, as the government is actively trying to encourage people to attend university, to obtain better qualifications.
- In recent years, consumer confidence has been high. There has been massive amounts of spending on both property and personal luxury items. This confidence has been underpinned by low interest rates and high levels of disposable income. Although confidence, can fluctuate, the signs are that confidence in property purchase, remains even if it diminishes for temporary periods of economic slowdown. The pointers still indicate, that the United Kingdom, needs more property.
- The population of the United Kingdom is aging, it is predicted by 2025, but there will be an estimated 64.8 million persons living in this country. This amount could increase further, if new member states of the EEC, decides to take up residence in the United Kingdom.
- There has been a marked change in our attitudes towards rental property. Previously, owning your own home was a social aspiration. However, there is now not so much stigma attached to renting property, in fact many sectors of the public prefer to read property. Also, because of changes in legislation and new rules and regulations, the standard of rental property is a lot higher than it was 30 or 40 years ago, most rental homes, now are indistinguishable from owner occupied property.
- There has been a change, in the countries working patterns. Not since the Industrial Revolution, have so many people travelled distances to their place of employment. The transport infrastructure in this country has improved dramatically but alas, there are no more cars on the road than ever before. Although many people will often consider taking employment hundred of miles from the main residence, because of transport delays and cost, many prefer to rent property near the place of work, during the week. This flexibility of the workforce, has also meant that there is an increased demand for rental property as workers move around the country to secure employment.
Assetsure provides UK landlord buy to let insurance for buildings and contents for private landlords, letting agents and property management companies in the United Kingdom.