Many people now look to their property as a key means of keeping them afloat in retirement – but what is the reality? By Tony Watts
An Englishman’s home is his castle. For many it is also his retirement plan as well.
The fact is that, for most of us, our biggest single asset is our home. And it’s older people who own most of the homes in Britain – many of them bought at a time when a respectable semi could be purchased for a few grand.
Over the last few years, as confidence in equities has ebbed away, and fewer of us trust in private pensions, property (despite the slide in prices) has seemed the ‘least bad place’ to stash our money – possibly alongside the mattress.
At any rate, it has been for those of us able to keep up the payments, or to conjure up a big enough deposit. And there are major developments afoot.
The National Housing Federation (who do, admittedly, have a slightly weighted perspective in the matter) declares that there is now an “unprecedented crisis” in the UK’s housing market. As evidence, the percentage of us actually owning our own home has sunk to levels last seen under Mrs Thatcher.
Pressure is rising in the pipeline because ever fewer houses are being built… nowhere near enough to meet projected demand… and many of those that are built are being snapped by my people with the cash and credit to buy to let.
Unlocking capital in your home
What will all this mean to existing homeowners? The NHF’s prognosis is that house values will rise in the coming few years (they say 20% by 2016), and so too will rents, making home ownership even more attractive.
Of course, those projections are not shared by all pundits – and the full impact of the economic downturn is still to be realised. But it’s worth noting that London (usually at the leading edge of price rises and falls in housing, has been in ‘positive territory’ since September 2009, according to the Land Registry.
All of us in or near retirement need to look very carefully at what capital we have locked up in our house, because there may come a day when we need to make use of that. Again, according to the Land Registry, the average price of property in London is £346,416 in comparison with the average for England and Wales of £163,049 – no mean sum. But how can you unlock that if push ever comes to shove?
The oft-touted option of equity release can provide a quick and easy solution: depending upon your age, situation and the value of your home, you can take out one of four main types.
1 With a ‘Lifetime Mortgage’ you borrow against the value of your home in return for a lump sum. You retain ownership of your home until you die or go into care, then that lump sum (plus any interest accrued) has to be repaid.
2 With an Interest Only Lifetime Mortgage, you keep up interest payments on the amount you borrow, so reducing what you pay back at the end.
3 A drawdown mortgage operates similarly to a Lifetime Mortgage, but you only take out as much money as you need as you go along. This can significantly reduce the interest that builds up.
4 Home Reversion Plans allow you to sell part or all of your home in return for a lump sum. You stay there, making no payments, until you die or move out.
Downsizing in retirement
All of these come with a wealth warning, in that inevitably you are paying interest for the privilege of borrowing money. With the fourth option, you are also taking a calculated risk on how long you will live. Releasing small sums of money to enjoy a few luxuries can also prove, over the years, not inexpensive. But as long as you take expert (independent) advice before you sign on the dotted line, it’s one way to go.
Downsizing is one option on many people’s future agenda: moving into a smaller property and releasing some of the equity. There are costs attached: moving home is never cheap, especially if the property you move into is above £250,000 and attracts the higher rate of stamp duty. But it can allow you to cut your outgoings and move closer to friends or family – or to a location where you don’t have to run a car.
One possibility is moving into a dedicated retirement property. There are plenty to choose from around the country, but they do vary enormously in what they offer – from apartment blocks with a community lounge and a drop-in manager through to delightfully appointed, fully-supported retirement villages. Here you can start off in an ‘independent living’ apartment, with sports and leisure facilities on hand, buy in care and domiciliary support as your needs change, and then move into an ‘assisted living’ apartment or onsite care home should you or your partner’s health decline further.
Choosing a retirement apartment
These properties all have service charges to pay, which cover maintenance and shared facilities, but you will know precisely what your outgoings will be – with no nasty surprises should the roof leak. One added bonus is greater security; another is having a ready-made community outside your front door – though that is not everyone’s cup of tea.
Added flexibility is possible with many apartments where you can rent as well as buy: so no stamp duty costs, no worries about selling in the future and much more flexibility should you need to move into care and release funds. You’ll need to invest enough money to ensure you can keep up payments into the future, but (with luck) you may have enough left over to enjoy a few luxuries along the way.
Making any of these decisions does, though, depend upon doing a lot of homework first. If you’re going to make a move, do it with your head as well as your heart – and make sure you will have enough money to cover you for the years ahead.
The RetireEasy online software programme allows you to run any number of different scenarios and see at a glance the exact impact upon your future situation should you take equity out of your home, downsize or move into a retirement property.