Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

TO buy-to-let or to upsize? That was the question my husband and I asked ourselves recently. Why? I lost vital years of paying into my pension when I freelanced to have the flexibility to look after our young children. If we were ever going to afford our dream retirement, we needed to look at ways of topping up our pension pots. And that meant putting our biggest asset - our house - to work.

Yet with interest rates going up for the fifth time in a row - making mortgages more expensive, no matter what our decision - we were going to need to think through our options very carefully.

The buy-to-let cons

One of the biggest factors to influence the buy-to-let market in recent years has been the 2017 tax benefit changes. Not only have landlords’ profits been affected by the reduction in the amount of mortgage costs that they can offset against rental income, they must pay a 3% stamp duty surcharge too.

On a more personal level, we also had to face up to the realities of being landlords. In addition to the initial outlay of buying a rental property and getting it up to a habitable standard, there would be lots of ongoing costs and time commitments. Everything from gas and electrical safety certificates to deposit protection paperwork and maintenance costs for wear and tear to other ad-hoc repairs.

There’s also the change in the government’s Energy Performance Certificate (EPC) requirements. With the onus now being on the property owner from 2025 to get their EPC rating up to scratch (which means a C band rating, as opposed to the E band required previously), this was likely to cost a pretty penny or two.

The buy-to-let pros

On the other hand, Propertymark - a leading membership body for property agents - recently suggested that renters are frantically chasing fewer properties at a time when many landlords are quitting the market1. This fall in the supply of rental properties, coupled with rapidly rising house prices putting house ownership out of reach for many, means the competition for good quality rental housing is high. This could potentially increase the rental prices and allay our fears of a having an empty rental on our hands - good news when lenders typically require rental income to cover at least 125% of monthly mortgage payments.2

The case for upsizing

The other route we were considering was to upsize, with a view to downsizing when we needed. We’d done all we possibly could to our current home to add value to it (adding both loft and ground floor extensions, as well as fully renovating it). Thanks to these improvements, we were acutely aware that if we sold it now, we’d get almost double the money we’d paid for it. We also recognised that as a semi-detached house, it would only ever achieve a certain price. Whereas if we sold up now, bought a larger, detached house that needed work and developed it, it had the potential to fetch far more in the future.

What was our decision?

In the end, we decided that investing in a buy-to-let wasn’t for us. Managing two mortgages and two houses, felt like a lot to take on while juggling full-time jobs and taking care of our girls.

Instead, we opted to upsize and start a new project. Yes, that’s a lot to take on as well, but we’ve developed both our previous homes while living in them and it seems this whole chaotic process quite suits us. You can read more about what we bought in my article about buying a bungalow or listen to the podcast about the rising popularity of bungalows.

In the process of buying the bungalow, we took the opportunity to take some of our equity and top up our self-invested personal pensions (SIPPs) to make the most of our pension allowances and give our money the best chance to grow over time. We also topped up our stocks and shares ISAs.

We did this because while returns from property can comprise both rents and any capital appreciation - potentially providing a great return for both property owners and buy-to-let landlords - it’s not guaranteed. And as most people buying a property (myself included) do so using a mortgage, they expose themselves to the property falling below the value of the debt owed (known as negative equity).

On the flipside, property tends to be more stable than shares over time. It’s also far less ‘liquid’ making it harder and more time consuming to buy a house than to buy shares - another risk.

With a stocks and shares investment it’s easier to mitigate these specific risks with a diversified portfolio. Investors in funds are typically exposed to dozens - or even hundreds - of individual companies so failure at any one of them can be absorbed.

The other reason we used the proceeds from our property sale to top up our pensions comes down to a simple, but highly powerful benefit: tax relief. A £1 contribution into a pension today typically costs you 80p if you live in the UK and are a basic-rate taxpayer or as little as 60p if you’re a higher-rate taxpayer.

Final thoughts

Property decisions are innately personal. A house is best seen as a home, a place to live, raise a family and enjoy… and not as the ultimate investment. If you’ve been planning on making wealth in property as part of your retirement income plans, ensure you take into account all the risks and potential downsides. You may find investing in the financial markets an easier path. And if you’re at all unsure and have significant money to invest, you may like to think about talking to a financial adviser.

1 Mortgage Solutions - June 2022
2 Investors Chronicle - December 2021

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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