Do I need a pension when I've got five buy-to-let properties?
03-13-2015
Christine Osborne has three properties here and two in Bulgaria. Should she sell? Or will her web business provide for her retirement? Our Pensions Doctor gives her verdict
Christine Osborne, 51, is worried her buy-to-let empire might be a house of cards
By Katie Morley
Question: "I am 51 and own quite a few properties - but I don't have a pension. I feel like I have a very precariously balanced property portfolio that could crumble the minute interest rates begin to rise. My partner and I have a property portfolio of three UK apartments (in Yorkshire) and a house (in Derbyshire), plus two holiday apartments in a ski resort in Bulgaria. Most of the properties, while providing a good rental yield (currently due to very low interest rates) have little or no equity.
The original plan when we went into buy-to-let was to release the capital from these properties in the runup to 2018, to pay off the interest-only mortgage on our home, and leave us with hopefully one or two properties that could provide an income in our old age.
Due to the poor performance of the property market we will have to extend the length of our mortgage in the hope that a few years down the line we can achieve this goal.
We are both self-employed and have also set up our own internet business. Our household income is around £40,000 per year — hopefully this will increase as we build our business.
We have been prepared to take risks in the past in taking the propertybefore-pension route, but this has clearly not paid off in recent years so I am becoming more risk-averse.
Our intention is to sell the apartment we own outright in Bulgaria and reinvest the money in an apartment in the same complex as the other apartment we have there, as it will be more rentable due to its central location. The apartment will be sold at a significant loss. However, if reinvested it will buy something of equal value that will hopefully go up in time.
The Bulgarian apartment we want to sell is out of town and in a poorly run complex where the lift often does not work so we cannot rent it out.
The house in Derbyshire attracts poor-quality tenants who move on frequently, generally leaving it in a state when they vacate. This property often needs costly maintenance. However, the mortgage on the house in Derbyshire is the best buy-to-let mortgage we have, and the property gives the best rental yield.
Is selling the Bulgaria property the right thing to do — and should we use the money to pay a small chunk off our home mortgage now or, as we plan, invest in something else that will give a better return?
The interest rate on our home mortgage is currently 4.94pc so any investment would have to beat that rate. We are also overpaying the mortgage on our house by £300 per month (we could spare £500 probably). But might this money be better going into a pension?"
Christine Osborne, by email
Answer: Your first priority should probably be to reduce your overall exposure to property and decrease the debt associated with the properties you own. While interest rates remain at historically low rates, meaning debt is cheap, your concerns about the impact any interest rate rises will have on your financial position are not unfounded.
Between 2000 and 2008, Bulgaria, like many other nations, saw a property boom. Unfortunately, the bubble burst towards the end of 2008 owing to the world economic and financial crisis, which led to prices in Bulgaria falling by as much as 30pc in 2009. There was a continuing decline in prices until last year, when prices started to show signs of recovery. However, as demonstrated by your figures, property prices remain significantly below the highs of 2008.
It could be a long time before prices climb above 2008 prices. For this reason, Sarah Lord, managing director of Killik Chartered Financial Planners, agrees with your suggestion to sell the second property in Bulgaria, particularly since you are not getting a rental income from it and therefore it is costing you to own it. But she says that it would be inappropriate to reinvest the proceeds from this sale in another property, especially in Bulgaria.
She says: "Christine and her partner's portfolio is not only predominately invested in the illiquid asset class of property, it is also heavily geared with significant debt outstanding. So the sale of the Bulgaria property will help reduce this property exposure, particularly if they also sell the Derbyshire property. Christine would be able to use the loss created on disposal of the Bulgaria property to offset the gain on the Derbyshire property and therefore, given the outlined loss on the Bulgaria property is significantly more than the gain on the Derbyshire property, capital gains tax would not be payable on sale of the Derbyshire property."
The sale of these two properties would release approximately £45,000, which could then be used to assist with creating a better balance in your joint overall portfolio. As a minimum, Ms Lord suggests you should have at least three months' income (approximately £10,000) in cash. The remainder of your capital could be used to either repay the mortgage or invest in Isas that they could use to boost their retirement income.
As you are not able to remortgage, your priority should be to gradually repay the debt outstanding on the properties. The largest single debt you have is the mortgage on your home. This also has the highest interest rate, so once you get your emergency fund sorted, you could use the remainder to repay some of the outstanding balance on your existing property. Before you do this, ensure there are no penalties or charges applied by the mortgage provider for overpayment.
An alternative to repaying the mortgage would be to invest the cash in an Isa or a pension to generate an investment return and start to build a pot of money that can sit alongside your property portfolio. It is possible for each of you to invest up to £15,000 into an Isa this tax year.
But given the interest rate on the mortgage is 4.94pc, once you allow for you both being basic-rate taxpayers, you would need investment return of at least 6.2pc a year to beat your mortgage.
Given that you are riskaverse, Ms Lord suggests such returns would be very ambitious, so you might be better off paying off your mortgage.
You have approximately £200 a month that you could put towards monthly savings. Rather than increase the amount you overpay on your mortgage each month, Ms Lord suggests you both set up low-cost pensions, such as stakeholder pensions, and contribute £100 a month each into these arrangements.
You will receive 20pc tax relief on your monthly contributions, which means that for every £100 you save the Government will top it up by £25. If you were to make these regular contributions for the next 10 years, you could each have a pension pot worth around £25,000 by the time you are in your sixties.