Property News                   

Your Property Your Pension

An increasing number of people are planning to use property to fund retirement but is that wise? Sarah Jagger looks at the pros and cons of investing in bricks and mortar.

Everyone seems to be talking about it and the figures are there to prove it. Research by the Pensions Policy Institute in May 2004 revealed that one in eight working people expects their property to be the main source of income when they retire.

But we could be setting ourselves up for a fall. Rising property prices have meant that many homeowners have seen the value of their homes rise significantly and a large number of people plan to use the equity that's built up to fill the gap.

But there's a concern that the market could be turned upside-down as a result, leading to a glut of family homes and a scarcity of smaller properties. As those who are downsizing will get less than they expected for their homes, and will have to spend more on a new, smaller home, this could well eat into the cash they were hoping would get them through their retirement.

The Association of British Insurers says the answer to retirement planning is not to rely on just one investment. It recommends a mixed bag - cash and equities as well as property. But the interest in investing in property shows no sign of abating.

In fact, the Government is actively encouraging it. From April next year, the type of assets pension funds can invest in will be expanded - making investment in property easier.

But this form of investment may not be for everyone, so what other options are there for using property to fund your retirement?

Trading down
Some people hope to sell their family home and move to a smaller property, releasing funds to be used as a pension.

As well as ridding yourself of the mortgage millstone, this also offers an important tax benefit. You don't have to pay capital gains tax on any profit as the family home is your principal residence. You can then use the extra cash to buy an annuity or set up an investment portfolio, or a mixture of the two.

However, trading down can be a risky strategy: you may not be able to sell your house or it may fetch less than you hoped. And retirement is costly: as a rough rule of thumb you'd need to release at least £100,000 to fund a relatively modest retirement (but this will depend on your individual circumstances and the level of income you're likely to need).

Source: Barclays Bank

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Government help for first time buyers

Date: May 05

Gordon Brown has announced steps to create further home ownership as he outlined plans to use public money

to help first-time buyers

who have been priced out of the housing market.

Under the new shared-ownership scheme approved buyers will be able to get a mortgage for only 50 to 75 per cent of the cost of a new home.

The government and the mortgage lender will acquire the rest of the equity, becoming co-investors in the property. The home buyer will be able to increase his or her stake as additional money becomes available.

Mr Brown said the scheme would help create an “asset-owning democracy”. But he denied that the government was trying to support prices; the shared ownership scheme would help stabilise the housing market across the cycle.

This can only be good news as extra demand at the bottom end of the market could support the current prices further up the housing chain which with the current stability of interest rates, income growth and unemployment will help to avoid any future housing market crashes.

To contribute to this latest boost to home buyers / homeowners, mortgage rates are dropping. Many lenders are announcing lower fixed and discounted rates. There is a lot of competition between lenders to attract borrowers at the moment and the easiest way is to offer market-leading rates. As always though, make sure you check the early repayment penalties with lenders as some do continue after the initial rate period.

Although there has been an evident decrease in activity within the housing market over the first part of the year compared to 2003/4, reports have shown that prices have remained stable. Nationwide’s Fionnuala Earley, group economist, said: “We will continue to see prices bumbling up and down, but there is a growing sentiment that the market is cooling rather than falling.”

The Bank of England Monetary Policy Committee will meet to review interest rates at the beginning of June and the feeling is that they will remain unchanged at 4.75% with a small possibility that a decrease to 4.5% could be announced. Again a stable month for borrowers all round either way.

James Benger

South West Mortgages

Mortgage quote service

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Stamp Duty Threshold Doubled

Date: March 05

Gordon Brown’s announcement that the stamp duty threshold will be doubled to £120,000 will provide a welcome boost to UK home buyers.

The move by the Chancellor in his ninth Budget should help first time buyers and will hopefully have a knock on affect for the rest of the housing market. Housing chains have to start somewhere and with more potential first time buyers this can only be good news for those sellers further up the chain.

The Bank of England has kept interest rates at 4.75% this month – still an all time low for 35 years. As a result we are still seeing two year fixed mortgage deals below 5% and for borrowers who prefer slightly more flexibility there are thousands of discounted and tracker rate products available again with many of these below 5%.

As a result of lenders offering such competitive rates a few have experienced difficulty dealing with an influx of applications which in turn has lead to a backlog, this may be something you want to be aware of if you are working to a tight deadline for exchange of contracts. However, the majority of lenders continue to offer an excellent service and meet any deadlines which are being imposed by the seller.

We have noticed lately a lot of advertising by lenders that promote ‘headline’ rates. Always be sure to check the redemption penalties on these products. It is possible that you will be tied into a mortgage after the ‘headline’ rate has expired, therefore you will be paying a higher percentage rate at this time compared to other products and often means that you end up paying more interest than necessary.

All in all March has proved to be a favorable month for home buyers and borrowers with the increase in the stamp duty threshold and interest rates remaining the same. We hope that April will continue to be positive as we move into the busiest part of the year for house purchases over the summer.

James Benger

South West Mortgages

Mortgage quote service

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