Can buy-to-let lifetime mortgages open up new avenues in real estate finance?

With an ageing population and volatile property values, it is becoming a popular option for many to boost their income, clear existing debts, or fund another property investment. 

However, like any financial product, it comes with it's own set of rules, risks, and rewards. 

Stay with us as we delve into this intricate yet increasingly appealing financial avenue for UK landlords.

As experts in the field of equity release, we have gathered the important information you need to guide your decision-making.

Therefore…

What Is a Buy-To-Let Lifetime Mortgage and How Does it Work?

A buy-to-let lifetime mortgage is an equity release product designed for landlords who want to release funds from their rental property or properties without having to sell them. 

There are different types of equity release that allow you to borrow a portion of your property's value while retaining ownership, and this is one of them.

The funds you release can be used for any purpose, such as boosting your retirement income, reinvesting in more properties, home improvements, or helping family members onto the property ladder.

Your plan provider considers the potential rental income of the estate to assess your capability to borrow when you are purchasing a property.

It allows them to decide whether they will approve your secured new loan. Most companies stipulate a certain percentage of rental income that is expected.

Please note:

BTL equity release mortgages are not currently available to new borrowers in the UK*, but this may change as interest rates stabilise.

 *Accurate as of 11/06/2023.

What Are the 5 Key Features?

BTL lifetime mortgage equity release have specific differences compared to traditional standard mortgages. 

Features that are similar to regular lifetime mortgages include:

• No Repayments During Lifetime: The loan and accrued interest are repaid at the end of the mortgage term, typically when the property is sold.
• Ownership Retention: You continue to own the property, retaining any potential growth in it's value.
• Flexibility of Funds Released: You can take the equity release as a lump sum or drawdown smaller amounts over time.
• Fixed Interest Rate: The interest rate is usually fixed for the life of the loan, providing certainty about the final repayment amount.
• No Negative Equity Guarantee: Many come with a no negative equity guarantee, meaning you will never owe more than the property is worth when sold.

Features that differ from lifetime mortgages include:

• You, nor any of your relations, can live on the property.
• The property must be let out under an Assured Shorthold Tenancy (AST).¹
• The property may not be sublet.

Also, take note:

Since they do not align with the Financial Conduct Authority's² lifetime mortgage criteria, these products operate without the authority's regulatory oversight.

What Are the Eligibility Criteria?

The eligibility criteria for buy-to-let equity release typically include:

• Being aged 55 or over.
• Owning a property in the UK that is rented out.
• The property should be in good condition.
• Having a property value that meets the lender's minimum property value (usually around £70,000).
• The property should not have any outstanding mortgage or it should be small enough to be paid off with the equity release.

Keep in mind that specific criteria can vary between lenders, so it is important to research and consult an equity release advisor for the most accurate information.

How Much Can I Borrow?

The amount you can borrow is typically determined by the value of the property and the age of the youngest applicant. 

For most equity release companies, the amount you can borrow is typically between 20% and 44% of the value of your property.³

What Are the Pros and Cons?

Like any financial product, it has advantages and disadvantages, including access to capital while reducing your inheritance.

More detail... 

Advantages

The advantages include: 

• Access to Capital: Allows you to unlock cash tied up in your property without needing to sell it.
• No Monthly Repayments: You do not need to worry about monthly repayments as the loan is repaid when the property is sold.
• Flexibility: You can choose to take the money as a lump sum or smaller regular amounts.
• Ownership Retention: You continue to benefit from any future rise in property value.

Disadvantages

The disadvantages include:

• Reduced Inheritance: The loan and accrued interest are repaid from the property's sale proceeds, potentially leaving less for your heirs.
• Compound Interest: As interest is not repaid regularly, it accrues over time, increasing the total amount to be repaid.
• Early Repayment Charges: There can be significant early repayment charges if you choose to settle earlier than planned.
• Eligibility Constraints: Only available to those aged 55 and over, and the property must meet certain criteria.
• Lack of Regulatory Governance: They do not align with the FCA's² lifetime mortgage criteria, so these products operate without the authority's regulatory oversight.

To navigate the pros and cons of these plans it is advisable to consult a professional equity release advisor or broker with experience across the entire market. 

What Are The Financial Implications?

Choosing a buy-to-let lifetime mortgage comes with several financial implications. 

These include the associated costs, the impact on the value of your property, and the role of interest rates, to name a few. 

The implications... 

What Does It Cost?

The costs include the interest on the loan, any fees charged by the lender, and potential valuation and legal fees. 

The interest rate can vary depending on market conditions and the terms of the mortgage. 

Additionally, the following fees may also apply:

• Application fees
• Arrangement or administration fees
• Advice fees (these may be waived in some cases)

As the cost can vary between lenders and mortgage products, it is advisable to carefully review the terms, compare different offers, and seek independent financial advice to ensure you understand the complete cost structure before proceeding.

Will My Property Value Affect the Loan?

Yes, your property's value plays a critical role in determining the amount you can borrow. 

Providers typically base the maximum loan amount on a percentage of your property's value. Hence, a higher property value could allow you to release more equity.

What Is the Role of Interest Rates?

The role of interest rates is crucial as it determines how much the loan will cost you over it's lifetime. 

The rate is typically fixed, meaning it will not change over the life of the loan. 

However:

As there are no monthly repayments, the interest is added to the loan, compounding over time and increasing the total amount to be repaid.

It is also important to note that interest rates are generally higher than traditional mortgages, and the compounding effect of these rates will significantly increase your overall debt in the long run.

What Role Do Rental Yields Play?

Whilst rental yields do not directly impact the amount you can borrow, they can influence a provider's assessment of your application. 

Strong rental yields indicate a profitable property, which may make your application more appealing to the provider. 

However, it is crucial to remember that rental income will not affect the loan repayment as the debt is repaid through the sale of the property.

What Are the Alternative Ways of Releasing Equity From a Buy-To-Let Property?

Alternatives to buy-to-let lifetime mortgages include downsizing, selling the property outright, or considering a traditional remortgage or further advance from your current lender. 

Each option has its own pros and cons, and you should seek professional advice before making a decision.

Can I Buy-to-Let With a Bad Credit Score?

Whilst a poor credit history may limit your options, some providers may still offer mortgages to individuals with bad credit, depending on the severity of the credit issues and the overall financial situation.

What Happens If My Buy-to-Let Property Falls into Negative Equity

If your property falls into negative equity, you will likely be protected by a 'no negative equity guarantee'. 

This means that even if the property falls into negative equity, you (or your estate) will not owe more than the property's sale proceeds at repayment.

Repayment and Early Settlement

You have the option to make no monthly repayments or you can choose to pay on a voluntary basis. 

You also have the option to settle the loan in full, but there may be early repayment charges involved. 

A closer look at these payment options... 

What Is the Process of Repaying My Plan?

A plan is typically repaid when the property is sold, usually when you pass away or move into long-term care. 

The mortgage debt, plus any accrued interest, is repaid from the sale's proceeds. If there is any surplus, it goes to you or your estate.

Remember:

During the course of the loan, you are able to make voluntary repayments either at regular intervals or on an ad hoc basis. 

This allows you to manage your debt and potentially reduce the overall amount owed when the property is sold. 

Is It Possible to Pay It off Early?

Yes, it is possible to repay your plan early, but this is usually subject to early repayment charges. 

These charges can be substantial, so it is essential to understand these costs and consult with your advisor or provider before proceeding with an early repayment.

Common Legal and Regulatory Concerns

It is important to be aware of the legal and regulatory concerns that come with this form of equity release. 

Consider the following...

What Is the Lifespan of a Buy-To-Let Lifetime Mortgage?

The lifespan of your plan is indefinite.

It continues until you pass away or move into long-term care, or if the property is sold for another reason. 

As there are no monthly repayments, the loan and accumulated interest are repaid from the proceeds of the property sale.

What Is the Impact of Stamp Duty?

The mortgage in itself does not attract Stamp Duty Land Tax (SDLT) as it is a loan secured against a property you already own. 

However, if you use the released funds to purchase additional properties, the usual SDLT rates for additional properties will apply.⁴ 

Always consult with a tax professional or solicitor to understand the potential tax implications.

What Happens to My Tenants?

In such cases, you remain the property owner, so your tenants' rights remain unaffected. 

The tenancy will continue as per the terms of the lease agreement; however, it is crucial to remember that when the mortgage ends, the property will need to be sold to repay the loan, and your tenants may need to find alternative accommodation.

Common Questions

In Conclusion

This type of lifetime mortgage offers a compelling route for UK landlords to unlock capital tied to their rental properties. 

However, understanding the intricacies - from the impact of interest rates to the implications of property valuation and rental yields - is crucial to making an informed decision. 

A careful, considered approach will help ensure your buy-to-let lifetime mortgage supports your financial goals without compromising your long-term security.