Pension rules putting squeeze on first-time buyers

First-time buyers are being squeezed out of the housing market as mortgage lenders target over 55s taking advantage of new pension “freedoms”.
You can take our lives but you can never take out freedom  even if it's just the freedom to invest in buy-to-let properties.You can take our lives but you can never take out freedom  even if it's just the freedom to invest in buy-to-let properties.
You can take our lives but you can never take out freedom  even if it's just the freedom to invest in buy-to-let properties.

Banks and building societies have launched a raft of new buy-to-let deals in bid to take advantage of rising demand from pension investors, taking the number of buy-to-let mortgages on the market to a seven-year high.

There are now more than 1,000 buy-to-let loans available, new Moneyfacts figures show, up from 701 a year ago and 474 in September 2013. The cost of buy-to-let loans has fallen too, with the current average fixed-rate deal now 3.8 per cent, down from 4.33 per cent two years ago.

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The upsurge in competition comes as lenders seek to attract business from people taking large cash sums out of their pension pots to invest in assets including property. More than a third of homeowners over the age of 55 intend to buy at least one more property in their lives, according to new research from Prudential. One in seven of the would-be buyers over the age of 55 said their plans have been prompted by new pension rules that took effect in April.

Those changes allow people aged 55 and over to access their entire pension pot without hefty tax penalties. Up to 25 per cent can still be taken tax-free, but the remainder is now taxed at the saver’s marginal rate rather than the previous 55 per cent.

Rachel Springall, finance expert at Moneyfacts, said: “Now that pensioners have more flexibility with their pension pot, the buy-to-let market will be an attractive area for them to get a regular return on an investment in property.”

Many of the over 55s are targeting the lower end of the market, where a lack of supply is already driving up house prices and thwarting the ambitions of first-time buyers.

The supply of homes going on sale in Edinburgh and the Lothians was down by almost 9 per cent in the three months to the end of July, compared to the same period a year ago, according to ESPC figures out last month. The gap between demand and supply was likely to continue widening and drive house prices up further, it said.

“Buy-to-let purchasers are likely to have an effect on first-time buyers, particularly in Edinburgh,” said Robin Purdie, director of MOV8 Financial in Edinburgh. “This problem may be compounded due to the new pension rules, as those who don’t seek proper advice look to ‘cash in’ and invest elsewhere.”

Demand for buy-to-let is expected to soften once new restrictions are imposed on the tax relief available to buy-to-let investors. Changes announced in the summer Budget will see the amount of tax that landlords can reclaim fall gradually from 45 to 20 per cent in the four years from April 2017.

Ratings agency Moody’s last month predicted that buy-to-let lending would fall in the short term as a result. Evidence so far suggests the impact of the proposed tax relief changes is being offset by the demand arising from the pension reforms, however.

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“In the immediate term it would take further tax implications or the government imposing product or criteria restrictions on lenders, and I can’t see either happening,” said Purdie.

He predicted that lenders would loosen criteria even further over the coming months, with more buy-to-let mortgages available at 80 per cent loan-to-value, as opposed to the current norm of 75 per cent.

“Lenders have a huge appetite to lend at the moment – they can’t make ‘product’ rates much lower, so in order to get more market share they have to loosen aspects of lending criteria,” he said.

“So this, combined with property always seeming to be an attractive asset class, means there will be no let-up in investors in the short term.”

The buy-to-let surge is less evident in Glasgow, according to David Rolleston, director of Mortgage Advice Brokerage. Where flats in the city are being sold to buy-to-let investors, the price is rarely above the home report valuation, he said.

“From my experience, proper buy-to let-investors look to get the yield and gearing ratio at a sensible level. What we are certainly seeing though, in the West End in particular, is that properties are selling for above home report value, especially where it would be a family home in a good school catchment area.”

Many buy-to-let investors in Scottish cities are parents buying properties for children at university in the city. However purchases in which a member of the family will live in the home aren’t classed as buy-to-let mortgages (even if most rooms are let out for an income).