Posted on 11 October 2011 by Yuen
My parents have been retired for the last 4 years and have been living on their private pension scheme, they have a state pension too. They are 62 and 65 and own their property outright. Recently they have been thinking of purchasing a property to rent out. Would my parents be able to release some equity from their existing property to act as a deposit and use the rental income/pension income as an ongoing income? Are there buy to let mortgage products for people who are retired? The propery that they are interested in buying is on the market for £165k and their existing property is valued at £300k. I look forward to hearing from you. Thanks
There are BTL mortgages available for people who have already retired and whilst the maximum age at the end of the mortgage term is 75 with most lenders there are a few who will extend the term to age 80 or even 90. A shorter term will either mean more expensive monthly payments to reduce the debt to zero or having to redeem the whole mortgage if an interest only repayment method is chosen.
The amount your parents can borrow will be determined by the anticipated rental income they receive. Lenders will normally want this to exceed the monthly mortgage interest by at least 125% and there are good reasons for this. During the life of an investment property there will be times when it is not let out and no rental income will be coming in, there will be unexpected and planned maintenance and repair costs to be met. The margin of rental income over mortgage payments allows a contingency fund to be built up to meet these demands and it should be used for this purpose instead of supplementing your parent's monthly income.
It should also be possible to raise the deposit on their existing residential property and unless an equity release mortgage is chosen they will have the same issues regarding cost vs. term. An equity release mortgage will not usually have a monthly repayment but will instead roll up the interest to be repaid on the sale of the property. This may be on death, sale or if your parents have to move into care. Either way it will reduce the amount of your parent's estate and it is not something they should enter into without taking independent legal advice or discussing the implications with any potential beneficiaries.
Whether or not it is all worthwhile will depend on the interest rates payable on 2 different mortgages and the amount received in rental income. I believe that we can help your parents reach the right decision and they should call 0344 346 3672 to speak to one of our independent mortgage advisers.
Answers provided in response to Ask the experts are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.
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