Paying Your Landlords Mortgage?

[VeryMeanReversion]

This logic is just daft.

I bought a ticket on an airline to Italy last week instead of buying a private jet. That means Ryanair is effectively paying my pension!!!

The logic is this:

I can choose between renting or buying the house I live in.

If buying, I have to pay out ~ £2000 a month (£450K house, 5-6% interest rate, IOM)

If renting, I have to pay ~£1000.

I choose to rent and put the difference into my pension, this creates a big pot for me to draw 25% from tax-free.

So the landlord is subsidising my living costs and I have chosen to invest the money in such a way as to provide a bigger pension, tax-free lump sum for any purpose (may be a house) and not touched my STR fund.

For your example to be valid you would have to compare buying the jet to the cost of a long-term lease rather than a single ticket.

VMR.

[bearbullfence]

The logic is this:

I can choose between renting or buying the house I live in.

If buying, I have to pay out ~ £2000 a month (£450K house, 5-6% interest rate, IOM)

If renting, I have to pay ~£1000.

I choose to rent and put the difference into my pension, this creates a big pot for me to draw 25% from tax-free.

So the landlord is subsidising my living costs and I have chosen to invest the money in such a way as to provide a bigger pension, tax-free lump sum for any purpose (may be a house) and not touched my STR fund.

For your example to be valid you would have to compare buying the jet to the cost of a long-term lease rather than a single ticket.

VMR.

I understand your choices. What you are saying is that a comparable house to buy is more expensive on a month by month basis than renting and therefore your landlord is paying your pension. Sorry, that logic is wrong. Besides you haven't fully explored the numbers. A simply monthly comparison is not effective, firstly you need to factor in the price of the home at the same time as you draw down your 25% pension, also that you wouldn't be paying a mortgage forever. And over 25 years you've not accounted for rent inflation.

Editted to say: I've just seen you are comparing with an Interest Only mortgage. So your values would be correct (obviously you still need to consider rent inflation.) However, the fact that you are comparing IO mortgage to buy a home tells me that you aren't ready for the responsibilities of home ownership.

Admittadly it is a nice soundbite, my landlord pays my pension, but in the end it is just daft.

If you don't like my example then I can use another. My company car scheme means I pay about £50 less a month than I would buying it. Doesn't mean my company pays my pension... actual it does, but I think you get my meaning.

Ahhh, what about - I used to pay £20 a month for a TV. Hughes electrical wan't paying my pension though.

Edited September 28, 2007 by bearbullfence

[basildonian]

...So the landlord is subsidising my living costs...

If he has no mortgage and is renting you the property for the current market rate he is not subsidising you.

Baz

[MongerOfDoom]

Worst case, I can use the pension fund to buy an annuity or drawdown income.

Yes, but you have no idea how much the effective tax rate will be (including the removal of any means tested benefits). It can be close to 100% even nowadays, though currently that only happens for a fairly narrow range of incomes and circumstances. I suspect I am not the only one to think that in could easily be over 50%, even before any new taxes on the pension pot are introduced. Obviously, money saved outwith a pension may also be subject to similar taxes, but the chances are they will be easier to avoid (and much easier to evade if that was what you wanted to do).

Do you still remember the "no increase in income tax" pre-election pledge? It was kept, and income tax was not increased. However, a new tax on income was introduced.

I know I cant rely on the 25% being available when I want it.

Tax-free lump sum? It was already described as a "much loved anomaly" by a chancellor, and there is no guarantee at all that it will not disappear. Pension regulations change faster than governments, and rarely for the better.

[R K]

If he has no mortgage and is renting you the property for the current market rate he is not subsidising you.

Baz

Of course he is. You are confusing the yield on the property with the personal funding circumstances of the landlord.

If a properties rent/market value is yielding less than an equivalent investment he is subsidising that investment. The BTL landlord is putting his capital at risk, has maintenance costs, perhaps utilities costs (water in my case), service charges etc. A safe cash investment with no downside risk today is paying +6%. If a BTL is yielding say 4% with the risk of capital losses, he is subsidising the tenant.

[sirius]

Does anybody else here use the savings from renting to put into their pension?

I found that the money I save by renting rather than paying an IO mortgage is enough to put an extra ~20% of salary into my pension.

Unlike the common view of renters paying the landlords mortgage, he is effectively paying my pension contributions and I get to reclaim the 40% tax.

If the 25% tax-free pension withdrawl is still allowed by the time I retire (17+ years left), the landlord will have paid enough into my pension to buy a house for for free, even if the currently high real house prices were maintained.

..and I still have my STM/STR/Vulture fund as a reserve.

If the rent doesn't cover a 100% IO mortgage, I don't see what's in it for a BTL'r.

VMR.

I would estimate that your chance of even getting back the money you have paid into your pension when it comes time for you to retire is zero. All the funds will be confiscated by the government at some point in future. I honestly think no form of investment is safe. The future is going to be totally different from the past as world governments slowly go bankrupt together with their economies.

[VeryMeanReversion]

However, the fact that you are comparing IO mortgage to buy a home tells me that you aren't ready for the responsibilities of home ownership.

It's just easier to use IO mortgages vs rent in these sorts of comparisons, and keep numbers in todays prices to avoid confusing the issue with nominal numbers and devaluing using contentious inflation measures. I have mostly rented but have also been a home owner, I prefer being an owner/mortgagee but the cost differential is currently excessive. I am stuffing the savings into my pension and when I buy again, stop the pension payments and pay off the house debt asap.

>Admittadly it is a nice soundbite, my landlord pays my pension, but in the end it is just daft.

It was intended to be a soundbite but there is logic behind it. (I had been reading the BBC pension thread previously)

It was also intended to reverse the common idea that the renter pays the landlords pension, i.e. BTL as a pension substitute. This does not make sense when yields are so low.

>If you don't like my example then I can use another. My company car scheme means I pay about £50 less a month than I would buying it. >Doesn't mean my company pays my pension... actual it does, but I think you get my meaning.

I get the meaning and you are of course, correct.

However, it means you should rent the car and not buy it. Same for the house. You could choose to put the savings into a pension and buy a car for cash when you retire (long wait for a car, but its effectively free). I think a house is the best example as a long-term rent vs buy decision.

The use of a pension to put the savings into was intended to show how the rent savings can be large enough to buy a house outright, using the tax-free 25% as a means to boost the cash payment.

VMR.

[Kurt Barlow]

Incidentally, in the '80s there was a bit of a push towards 'pension mortgages'. I don't hear anything about them these days. Does anybody know if they are still sold?

If your a middle income earner say £50K a year a pension mortgage maybe worth a punt becuase you are likely to benefit from a very generous tax differntial between contributions (tax relief at 40%) and tax on payments later on (income tax at 22%)

[basildonian]

Of course he is. You are confusing the yield on the property with the personal funding circumstances of the landlord.

If a properties rent/market value is yielding less than an equivalent investment he is subsidising that investment. The BTL landlord is putting his capital at risk, has maintenance costs, perhaps utilities costs (water in my case), service charges etc. A safe cash investment with no downside risk today is paying +6%. If a BTL is yielding say 4% with the risk of capital losses, he is subsidising the tenant.

...Assuming there is no capital growth in the (mortgage free) property. Remember the OP is talking about a 17 year period (plus however long the property has already been let).

Baz

[R K]

...Assuming there is no capital growth in the (mortgage free) property. Remember the OP is talking about a 17 year period (plus however long the property has already been let).

Baz

You are still missing the point. Their is potential capital growth/losses in any alternative asset class. The property is as likely to suffer capital losses as capital growth. The OP is saying, if I understand correctly, and I agree, that at the present time a yield of 3-4% on property means the owner is subsidising the tenant. This will hold true until (and if) rental yields rise or property prices fall substantially (double/halve) or a combination of the two. That is basic maths I'm afraid.