Homeowners could end up £326,000 wealthier over a 30-year period than those who rent – and that is before potential property price growth is even considered, a new report claims.
Nearly half of homeowners with a mortgage said they were able to save more because their loan was cheaper than renting, according to the research from the Equity Release Council.
This is now being exacerbated by extremely cheap interest rates on mortgages, which are currently as low as 0.83 per cent for those with the biggest deposits.
Nearly half of homeowners said their mortgage was cheaper than renting, which enabled them to save more money – and their housing wealth could also help fund their retirements
The report highlighted a growing divide between homeowners and renters, as owning a property becomes more critical to families’ financial security and wellbeing in later life.
While nearly one in three homeowners saw their mortgage as being ‘an investment in their future’, more than half of people who had not yet bought a home thought it was ‘unrealistic’ they ever would.
Younger generations would continue to struggle with building up big enough deposits to get on to the housing ladder, the report said, meaning it would be more challenging for them to build up savings for retirement.
The end of final salary pension schemes is also a significant factor in this.
The report found that, for every £1,000 the average employee earns, they can expect just £150 from a defined contribution scheme, compared with £670 from a defined benefit scheme.
As such, it said many existing homeowners were considering using wealth tied up in their home to boost their retirement income through schemes such as equity release – though these are not without their issues, as we explain in the box below.
Around two in five said they believed having a mortgage in later life was becoming more acceptable, and 57 per cant said they were looking at ways to release equity from their properties.
Twilight years: Older homeowners can use the cash tied up in their properties to help fund their retirements – but renters do not have the same luxury
David Burrowes, chair of the Equity Release Council, said: ‘Property and pensions form the bedrock of financial security for most people, but the rules of engagement have changed substantially over the last 30 years.
‘People are living and working longer with responsibility to fund their later years and will need to think differently about their financial decisions at different life stages.
‘For those who manage to buy their own home during their working lives, the extra confidence and flexibility this provides will be even more critical to their financial wellbeing than it is today.
‘While today’s homebuyers are borrowing larger sums for longer, they are also building considerable equity which can help meet future needs for themselves and their families.’
He added that future generations expected to receive an inheritance in the form of property or money – but many did not expect to receive this until their mid-40s to 60s, significantly later than the typical first-time buyer age.
The report also called for the Government to follow up on its pledge to ‘help Generation Rent become Generation Buy’.
Jim Boyd, chief executive of the Equity Release Council, added: ‘Hopes that younger generations will enjoy greater opportunities over longer lives in good health compared to their parents must be balanced by the significantly more complicated financial decisions they face, driven by the realities of elevated property prices and the decline of generous pension schemes.’
Claire Singleton of Legal & General Home Finance said she had seen a spike in enquiries from older people who wanted to use cash tied up in their home to help younger family members buy a property.
‘Getting on to the property ladder can be one of the more challenging financial goals that people face, particularly in a climate of double-digit house price growth,’ she said.
More older property owners are considering gifting money from their home to help family members get on the housing ladder, according to Legal & General Home Finance
‘With this in mind, it’s perhaps no wonder that at Legal & General we are seeing a growing number of enquiries about how people can use their own property wealth to help loved ones secure their first home.
‘We saw a 96 per cent rise in the number of enquiries about gifting money to loved ones in the first five months of this year, compared to 2020.’
However, she warned that gifters should consider how they would fund their retirement before giving away large sums.
‘While gifting can be a really positive experience, for both parties, it’s important to fully consider the role property wealth will play in helping meet your own retirement needs before supporting loved ones,’ she said.
Data from the Office for Budget Responsibility has shown that retirees have been some of the biggest beneficiaries from the Covid-19 crisis, making huge savings from being unable to spend on holidays and going out.
A stamp duty holiday through much of the pandemic also helped house prices to grow.
Is equity release for me?
According to equity release provider Key, 557,000 Britons have used equity release in the past 20 years, releasing more than £32billion of cash.
Equity release is a type of mortgage which effectively advances part of the value of a property to a homeowner over the age of 55, while they are still living it.
The balance, plus interest, is then paid off by the sale of the house when the owner dies or moves into care.
Downsizing is another option older homeowners may wish to consider
Historically, equity release had a controversial reputation. This was partly because in the early days there was no option to make repayments until after the borrower had died.
But the sector has exploded in the last couple of years as rates have come down and borrowers have been given the option of paying interest as they go, as well as taking ‘drawdown’ options which allow them to withdraw money gradually and only pay interest on the sum they have taken out.
While the options in the sector have improved, some experts argue that equity release should still be a last resort for funding retirement.
One concern is the fees charged by equity release lenders for paperwork when borrowers want to make changes to their plans.
For example, an investigation by This is Money’s sister title, Money Mail found that one major lender charged £600 in admin costs.
The cost is also compounded because equity release decisions can only be made after talking to an independent adviser — which can add thousands of pounds to the bill.
In addition, taking wealth out from a property means less of an inheritance is left for the owner’s family.
Alternatives to equity release include a regular remortgage and a retirement interest-only mortgage.
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