Nic Cicutti: Banking on property windfall is misguided

Nic Cicutti

A few months ago, I wrote about my experience of applying for an increased mortgage in order to fund some additional building work to our home.

One of the by-products of the borrowing process involved a property valuation to determine whether our home was worth lending the additional sum against. Happily, the valuation came in at the top end of the amount we told the lender our home is currently worth. The mortgage has now gone through.

More importantly, the valuation also effectively told us that if, in years to come, we need to downsize and move somewhere more physically manageable in our village, with one or two less bedrooms perhaps, we will have a tidy sum left over to dispose of as we wish.

Given that we have no children, the most likely purpose of that money would be to provide additional income in our old age. For us, our property may literally become part of our pension – if we need it to be.

I was thinking of this as I read last week of FCA chief executive Andrew Bailey’s comments to the effect that consumers might be able use their homes to fund retirement income, rather than saving for both property and a pension at the same time.

According to Money Marketing, Bailey’s speech at a retirement conference in Scotland was based on a theoretical model of so-called “lifetime saving”, where the majority of us tend to concentrate the money we set aside on two distinct areas: our home and our retirement.

Given the increase in the cost of both, requiring longer and longer mortgage repayment periods and bigger proportions of our current incomes to fund our retirement, the focus for many is on the here and now: paying for the home we live in at the expense of our future pension.

Bailey stated he was opposed to savers putting a greater proportion of their assets into property, for example, second homes or buy-to-let. However, he also suggested that when the time comes it might be possible for some people to make use of some of the equity in their own homes to boost their retirement income.

His comments certainly chime with consumers’ own expectations. Surveys have repeatedly shown that borrowers expect to use the equity in their homes to help fund their pensions. The problem with those views is, with few exceptions such as myself, they are hopelessly optimistic – and potentially dangerous.

People may think of it as such, but property is not a pension. You are rarely able to sell it and simply keep the money. The only way to do so is if you downsize and keep the profit, but the numbers of those with lots of cash to spare after selling up is very small.

When I last researched the subject, I found that one in three house sales does indeed involve people selling up to move to a smaller property.

However, some 54 per cent of those who downsize do so mainly to get rid of their mortgage, not because they want equity from their property as cash in hand. A further 15 per cent were doing so because they had split up from their partners, suggesting there was not likely to be much cash to spare there.

About 20 per cent of those selling up in order to move into smaller properties are retirees over 60. But many of those are looking to clear their mortgages, hardly surprising, given that average incomes after retirement tend to plummet.

Only 12 per cent of those who bought a smaller property (4 per cent of the total number of buyers) actually took the cash. And even then they often “recycled” it, giving their children a leg up the property ladder instead.

In other words, property is not the cash-generative machine many people think it might be, all the more so as the amount of money likely to be available for some of the equity release plans currently on the market is likely to be small.

Aviva’s website, which has a calculator allowing consumers to estimate how much equity they might be able to release from their property, told me that for a couple whose youngest applicant was aged 65 would be able to borrow about 31 per cent against the unencumbered value of their property. Adding an inheritance guarantee would reduce that amount further.

Do not get me wrong, for a minority of badly-off borrowers the amounts involved do matter: an extra £50 or £100 a week is not to be sneezed at. But it is certainly not the bonanza that many people expect it to be.

More importantly, not only are these sums likely to be available to a small minority of homeowners who are able to downsize with a decent pot of money left over, they will also be at the expense of intergenerational property purchases by their children.

My worry is while Bailey’s comments do not really address the real problem of inadequate retirement incomes, they will raise expectations while opening the floodgates to a repeat of the Fisher Prew Smith equity release misselling scandal of the late 1980s. Hundreds of thousands of homeowners may, quite literally, be a lot poorer for his words.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk