Could Equity Release mortgages be the ultimate exit plan for property investors?
Have you given much thought to the many exit strategies that exist for your buy to let portfolio?
The vast majority of buy to let mortgages have been taken out on an interest only basis on the expectation that repayment of the mortgage will eventually come as a result of a sale of the property at a point when capital values have grown substantially.
Is a sale absolutely necessary though? It might be if the loan term comes to an end and the property can't be refinanced.
However, a sale could well trigger a capital gain and associated taxation.
We have, therefore, projected* below the future capital values and rental income from a portfolio assuming that property values double every 10 years (averaged compound growth of 7.2%) and the effects of 2% inflation on rental income. In this example the portfolio has a starting value of £1,333,000, mortgages outstanding of £814,700 and rental income of £8,598 per month. We have further assumed that the mortgages will be increased to the maximum based on an average interest rate of 6.5% and the lower of 80% LTV or the maximum loan based on 125% interest cover. In our assumptions we also discounted rentals by £7,632 per annum to take account of historical levels of voids and we increased expenses incurred to manage, let and insure the portfolio by 2% per annum to allow for inflation. We then capped the maximum funding to ensure that at no point would cashflow be negative. The results came out as follows:
As you can see from this example, even if you keep remortgaging to release as much money as possible, as time goes on the difference in rental growth compared to property growth will eventually restrict the maximum funding viability and at that point your equity will build very rapidly. At the same time your loans will reduce as a percentage of the value of your portfolio. There may, at that point, be an opportunity for you to switch your funding to a Lifetime Mortgage model. This is where interest rolls up, thus reducing your monthly interest payments to nil and substantially improving your cashflow and retirement income. As the interest is still being charged but not serviced, it can still be offset against income so your improved cashflow should not result in any increased taxation and, over time, could even reduce your income tax liabilities.
The same capital growth might also apply to your private residence thus giving you the opportunity to consider equity release as an exit route for the mortgage too.
There are several strategies that you can utilise to fund your retirement whilst enjoying your life now, however, some are less obvious than the others.
Make sure you contact us today to:
Please note that the minimum age to qualify for an Equity Release mortgage is 55.
* Calculations used are based on example only.