Rather predictably, the publication last week of data prepared by the Halifax, which suggested that by the end of September the average UK home’s value was a smidgeon lower (£293,399) than the property sector’s all-time high (£293,507), attracted plenty of attention.
According to the Halifax, property values rose by 4.7% in the 12 months to 30th September, a surge attributable to steadily rising wages and slowly falling interest rates, a powerful combination which has resulted in the average home being worth £13,000 more than it was this time last year.
In light of what has been a tough 12 months for many, it’s comforting for homeowners to learn that what is probably their most valuable asset has, on average, appreciated at a rate of just over £1,000 a month. Such data-supported conclusions induce and subsequently nurture both confidence and optimism among homeowners, creating a widespread phenomenon known as the ‘wealth effect’. We respond to this effect by increasing our spending on everything from ‘big ticket’ consumer goods to more modest treats like taking short holiday breaks or eating out more frequently.
Credible data, coupled with the overtly positive language surrounding rising property values, fuels the wealth effect, particularly if the market is deemed to be ‘recovering’; meanwhile, towns and other areas where property values are increasing rapidly are soon considered ‘more desirable’. Conversely, when property prices start falling, as they tend to every six or seven years, the market is described as ‘depressed’ and the ‘wealth effect’ becomes more benign, occasionally evaporating altogether, albeit temporarily.
Some economists maintain that although rising property values are generally considered a good thing, this is not necessarily the case for older homeowners, especially those who have little or no intention of subjecting themselves to the process of moving home.
As average property values surge towards the £300,000 mark, it’s no surprise to discover that an increasing number of younger people struggle to climb onto the property ladder. Consequently, they face years of renting a home while endeavouring to save enough money to use as a deposit for a home of their own. This has always been the case, but it will become considerably more difficult as private property landlords are forced out of the rental market to satisfy political decision making. The result of this policy, as any GCSE student will tell you, is already causing a massive reduction in the supply of properties to rent and an increase in rent levels, especially as demand for decent rental properties remains strong.
Mindful of this forthcoming unnecessary disruption to the private rental sector, a sizeable number of older homeowners possess one option in particular which enables them to turn their property into ‘useful wealth’ without too much difficulty and effectively avoid the upheaval and cost of moving home.
By releasing a percentage of the equity built up in their property, usually over many years, older homeowners are presented with the opportunity to take advantage of rising property values and give their loved ones an unprecedented step-up onto the property ladder. They may even decide to utilise the untapped ‘bricks and mortar wealth’ and treat themselves.
In their well-established role as parents, most older homeowners have grown used to helping out their offspring in a variety of ways; though by no means compulsory, financial assistance is high on the list of parental commitments.
Indeed, by applying the Halifax data above to real life, we can see how property can be an extremely useful asset.
It’s far from outrageous to suggest that older homeowners, ie aged 55 and above, occupying a house worth almost £300,000, have long since celebrated paying off their mortgage. Their adult offspring, meanwhile, may be saving as furiously as possible to get a toehold on the property ladder’s first rung. There are times when this can feel like little more than a distant dream, such as when a report recently published by Rightmove declared that first time buyers (FTB) pay an average of £227,000 for a place they can call their own.
By releasing a percentage of the capital from their property, however, older homeowners can help their child(ren) realise that seemingly elusive property dream.
Let’s assume our older homeowners, Sue and Bob, occupy a mortgage-free house worth £293,000. Following a consultation with an equity release adviser, the couple discover that they can release 20% of their home’s current value, ie £58,600, as a tax-free lump sum. Following completion of the necessary paperwork, the money is paid directly into their bank account.. Moreover, should they decide, Sue and Bob do not have to make monthly repayments on the ‘lifetime mortgage’ used to facilitate the release of wealth from their home.
However, recent innovations in the equity release market now do permit voluntary payments of upto at least 10% of the original amount borrowed each year, with no penalty. An excellent way to manage any burgeoning interest roll-up should your budget allow.
Let’s also assume that Sue and Bob transfer the £58,600 to their son Alan and his wife, Caroline, for the younger couple (who are FTBs) to use as a deposit on a house worth £227,000. Putting down a deposit of more than 25% ensures the younger duo need only apply for a mortgage of £168,400; currently, 25-year, fixed rate mortgages can be secured at initial rates of 4.2%, meaning their monthly mortgage cost would be £908, a figure likely to be less than the monthly rent they’re paying.
But Sue and Bob could go further. They have calculated that instead of releasing 20% of their home’s current value, they may be able to release 25%, or £73,250. They can still transfer £58,600 to Alan and Caroline and use the balance of £14,650 for their own personal needs: a new bathroom; kitchen makeover; a landscaped garden, or perhaps a couple of big-ticket holidays.
Many older homeowners would consider helping their adult children onto the property ladder is one of the most useful things they could do. Their offspring would undoubtedly agree.
