It might seem as though houses are priced in monopoly money these days – but don’t assume the roof over your head will be your ‘get out of jail free’ card when it comes to saving for a pension.
It’s not hard to see why so many are lulled into a false sense of security. Many people have made thousands – if not hundreds of thousands – of pounds from the property market by doing nothing more risky than buying a modest family home and living in it while their kids grow up.
The boom over the last few decades can seem like the golden goose that won’t stop laying: a recent report by a London School of Economics professor (albeit sponsored by Santander) suggested that prices could double again in the next 15 years.
Some have dismissed these findings as optimistic – but it’s hard not to shake the feeling that even with a few Brexit-related stumbles on route, property prices are on a one way trajectory.
If money is tight for pension savings, or returns have been lacklustre of late, why not dip into these property gains to ensure a similar standard of living in retirement?
The main stumbling block is the difficulty in turning these notional gains into hard currency. The most cost effective way is downsizing, in other words cashing in your chips and moving somewhere smaller and cheaper.
But to maximise the value in your home you need to move somewhere significantly smaller (losing one bedroom is barely going to cover the stamp duty and estate agents fees) or to a vastly cheaper area. Exchanging your chi-chi postcode for a slightly more down-at-heel area nearby isn’t going to release untold wealth. The reality is few 60-somethings want to downsize to a two-bed flat or move hundreds of miles across the country when they first retire. Besides, neither may be practical if their now grown-up children are boomeranging back because they can’t afford to get a toe-hold on the same super-charged property ladder.
This perhaps explains why the other option – equity release mortgages – have soared in recent years. In the first six months of this year alone, sales of equity release plans were up by 11%, while the amount of money released via these schemes increased by 24%. In total, the over 60s released more than £934m through equity release plans in the first half of this year – according to a new report from Key Retirement Solutions, an equity release adviser. Insurer Legal & General also said it was now selling more equity release plans than annuities.
These financial products might seem like a pain-free way of getting cash out of your home: you remortgage your property releasing a cash lump sum. But rather than make monthly repayments, this debt, plus the interest owed, is repaid when you sell the property – usually after death, or when you move into a care home.
These plans are particularly popular with those in their 60s and early 70s and are used for paying for all manner of things: home improvements, clearing debts, holidays and helping family – often to help the next generation onto the property ladder.
But while this ‘cash now, pay later’ mentality may appeal to the baby-boomers who first embraced the credit culture, it could be storing up massive problems for the future.
The interest on these loans is typically around 6%. At this rate the debt doubles every 12 years. So releasing £35,000 at the age of 60 means homeowners owe £70,000 at 72 and £140,000 at 84 – well within normal life expectancy.
Those who live beyond this and celebrate their 96th birthday will find they owe £280,000. (Although it’s worth pointing out almost all equity release mortgages have a no negative equity guarantee – meaning the debt can’t exceed the value of your home).
If your house prices appreciates at a faster rate this may not be a problem – but that is quite some gamble. If they don’t it could end up being an eye-wateringly expensive holiday. You might also find the equity release company gets a bigger share of the equity in your home than your children.
But there’s a more significant problem. Those taking out these loans in their 60s and early 70s can find they have far fewer options as they age. It’s a fact of life many older retirees need to adapt their home for decreased mobility, or move into more sheltered accommodation. Often there is simply not the equity in their home to allow them to do this – and restrictions making it hard to ‘port’ these loans.
Rather than a ‘get out of jail free’ card these financial products release relatively little cash and effectively lock you into the family home – while paying the ‘jailor’ a generous fee.
This may not sound too much of a problem for affluent sixty-somethings, looking forward to an actively retirement. It’s quite a different picture for those heading into their 90s who may have lost a spouse or suffered more serious health problems. They could find the goose has stopped laying just when they need it most.
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