The real world risk when downsizing

Posted on: 28 May 2014 by 50connect editorial

Over 50s downsizing face challenge to get value for money in over inflated property market.

Rich list

It’s not just that you are living in a different part of town – sometimes it seems as if you are on a different planet!

Ploughing through the Sunday Times “Rich List”, where £100 million gets you to 863rd place along with motor-racing Ross Brawn and Led Zeppelin’s Jimmy Page and 43 others, before worrying about Gary Barlow, who has now got to repay £56m to the taxman along with two of his Take That mates because of an outlawed tax avoidance scheme, it can be tough to remember we are dealing with the real world – not fiction.

The same feelings return when reading of £140m flats and 20% annual house price increases, unless, that is, you live in Eaton Square, Knightsbridge or Park Lane.

Such an imbalance in our society can be judged by the fact that the top 64 names in the Rich List with a combined fortune of £255 billion roughly match the total wealth of the poorest 30% of the population.

Even in this age of celebrity, the obsession with the “have’s” rather than the “have not’s” shows little sign of abating, rather like our infatuation with property, or rather property prices.

The current value of your home is the main ingredient of conversation at dinner parties and in pubs. Small wonder you are desperate to get on the property ladder – no home, no house, therefore no chance of joining the conversation!

It’s easy to get caught up in this material world, to succumb to the pressures of acquiring assets as a priority in order to maintain a certain social status. It’s a strategy that your Independent Financial Adviser will demonstrate is unlikely to bring genuine long-term gains, let alone a stress-free life, unless very carefully though through.

Your own experience, whether trying to get a mortgage or a bank loan, will have already taught you that current financial life is not that simple or easy for 99% of the population. With expert help, you build carefully and slowly over many years, creating a portfolio and spread of pension, property, savings and investments that protect and provide for you and your family.

That’s the reality of life, a world away from chauffeurs, indoor swimming pools, private yachts, jets and Caribbean hideaways.

Yet, it’s the impact of super-rich and foreign money that has provoked Mark Carney, the new Governor of the Bank of England, to declare the booming housing market is now the single biggest threat to the economy, singling out the government’s “Help to Buy” scheme as potentially encouraging a return to risky loans.

Those were the headlines, although Carney’s words were less condemning: “Help to Buy is a relatively small programme at this point, but it could grow a lot and it could change attitudes in other parts of the mortgage market. That’s why we have to be vigilant.”

Putting Help to Buy in the dock for the property bubble seems unfair, especially as a major lender, the Royal Bank of Scotland, has revealed a 7% drop in the size of loans since the end of 2013. The Help to Buy scheme was launched last October. It allows borrowers with a 5% deposit to buy, with the government guaranteeing up to 15% of the mortgage, thus reducing the risk to lenders.

The average H2B loan in December was £158,055, according to RBS figures – and £147,330 in April.

Now the UK’s biggest mortgage lender – the Lloyds Banking Group – is banning home loans of more than four times income on mortgages more than £500,000, an instant reaction to the Governor’s warning. Previously, Lloyds, which provides one in five new mortgages, would lend five times or even more.

So what has happened to “affordability” – the watchword of the new regulations of the Mortgage Market Review (MMR) which came into force officially at the end of April. Those new restrictions and the forensic stress-testing of a customer’s spending are already having an impact on applications, as they will on approvals.

IFAs have been carefully steering applicants through the new process and preparing them for a much more vigorous examination of their financial situation, as many of the MMR’s recommendations were in place long before their official launch.

Irresponsible lending will never be eradicated, but reducing it has been a priority of lenders for many months, if not years, after the crisis of 2008.

Governor Carney did get onto the topic that many feel is the “real” housing issue in the UK – not enough new homes. “The issues around the housing market are that there are not sufficient homes built in the UK.”

He contrasted here with his native Canada: “There are half as many people in Canada as in the UK, but twice as many houses are built in Canada every year.”

The figure is rising and 112,000 homes were constructed in the 12 months to March, yet this is still a third less than were built in 2007 (177,000).

As well as new homes, there is certainly scope for freeing up larger homes with many pensioners rattling around in three-four bed-roomed houses that do not even suit the needs of old age.

A new survey by the Prudential showed that more than one in four over-55’s plan to downsize in the next five years. As well as the desire to move to a more manageable dwelling, it’s a chance to release some equity to provide for old age or pass on to the family.

These are relatively simple choices, but still ones that should not be taken without specialist financial advice. Your IFA can explain the consequences of the various options so you can make an educated choice that does not leave you vulnerable or out of pocket.

The government could play a part in making this downsizing option more attractive to the older generation. The Prudential also found out that many more than 28% would make this move if it were not for the costs associated with moving house – legal bills, removal costs and, especially, stamp duty.

The Coalition Government may have worries about the housing “bubble” – but the Treasury is collecting £27m every day from stamp duty, a staggering 40% increase from last year. Her Majesty’s Revenue and Customs has also revealed that seven in ten property transactions now attract stamp duty, compared with less than half in the late 1990s!

Not that too much of the above is going to bother those in the Sunday Times “Rich List”. Britain now has 104 billionaires; many come from abroad, like Chelsea owner Roman Abramovich (ninth with £8.52bn), but he is just ahead of the home-grown Duke of Westminster, owner of 300 acres of Belgravia, Mayfair and Oxford Street.

Newcastle United owner Mike Ashley takes 22nd spot with £3.75bn, thanks largely to his transformation of Sports Direct, and his fortune rose by nearly 40% in the year. Impresario Cameron Mackintosh, who saw the potential in Les Miserables, just sneaks into the billionaires’ pile.

So for a few minutes we can dream and imagine how we would start spending all that money. Then it’s back to reality, financial reality and the carefully guiding hand of your IFA, who makes sure your world, is the real one!

For a free, no obligation initial chat about your individual finances, call us on 0800 0112825, e-mail or take a look at our website

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