Property: Not "dead" moneyPosted on: 20 March 2015 by Steve Wanless
There is growing evidence that the UK’s love affair with property-ownership may be on the wane.
Not that there is any less passion when it comes to homes, but circumstances are increasingly keeping the young apart from their dream.
They are learning that buying is not the only option.
Renting may seem second best to some, but there are advantages, not least financial – no stamp duty, no rigorous mortgage testing, no estate agents or solicitor’s fees and no early redemption charges if you have to move during your fixed-rate period.
Certainly the “affordability” stress test, introduced by the Mortgage Market Review (MMR) last April, has kept Independent Financial Advisers (IFAs) busy for those who still want to buy.
Those using the expertise of an IFA to get the best mortgage deal, or even just get any mortgage deal, has risen significantly, especially those who are re-mortgaging. The 2014 figures for those using an IFA was 61%, a rise of 13% on the previous year.
Reports also claim those using the services of an IFA were more likely to get the headline low rates. Part of the reason for this is the advice given by lenders only relates to their own products.
Whereas, if borrowers can resist the urge to rush at the property ladder because prices are getting higher, they can give themselves a better chance of getting a better deal by choosing from the whole mortgage market, with the help of an IFA.
Priced out of the mortgage market
Recently-published figures from the English Housing Survey showed that 48% of households, made up of 25-34 year olds, rented in 2013-14, a 3% rise from the previous year and more than double the 21% total of a decade ago.
Over the same decade, owner-occupation of the same age group has dropped from 59% to 36% - many of those not owning or renting are still at home with mum and dad.
“The shortage of affordable homes is leaving young adults with no choice, but to remain stuck in their childhood bedrooms, or face decades paying out dead money to landlords,” was the verdict of Campbell Robb, chief executive of Shelter.
Clearly, many youngsters do not agree that rent is “dead” money. Not everyone wants the responsibility of a mortgage, especially when young.
Why the rush? There is always the likelihood of an inheritance at some stage and it’s likely your salary will be higher as you progress up the career ladder.
The latest figures from the English Housing Survey revealed another interesting trend. The previous figures showed an equal split between those who owned their homes outright – and those with a mortgage.
Not anymore. The recent figures showed that of the 22.6 million households in England, 7.4m owned their homes outright and 6.9 million had a mortgage (the remainder rented).
Whether this increase is because homeowners want to clear debt as they get older or because the lenders are restricting loans to the older generation only time and future statistics will tell. Many banks and building societies have reduced the age limit at which borrowers can have a mortgage.
It was the first time since records began that outright ownership has been greater than households with mortgages.
Reversing the trend of home ownership
The survey also revealed that home-ownership fell to its lowest level in 30 years in 2014. That figure was 63% - below the French figure of 64.3%.
Go back to 1945, at the end of the Second World War. Then the home-owning figure was 26%; it wasn’t until the early 1970s that owning overtook renting.
The peak came in 2003, the year Jonny Wilkinson dropped the goal to win the Rugby World Cup for England, when 71% of households had belonged to home owners.
The political parties still believe there are votes in home owning, especially as we approach May’s General Election. It’s the younger generation that is the target.
The Conservatives have promised to build 200,000 homes for first-time buyers over the next five years, double the current commitment. The starter homes (for those under the age of 40) will be offered at a 20% below market prices.
Under the scheme, developers will be exempt from laws that require them to provide affordable housing that can add £15,000 to the cost of new-build properties.
Those interested have already begun registering on the starter homes website. You can type in your postcode and get a list of the developments and prices in your area.
The home would be sold at a maximum price of £250,000 outside London and £450,000 in the capital for first-time buyers.
As with mortgages, the key to renting for many is “affordability”. A recent poll by the flat-sharing website weroom.com revealed that 55% of people would happily never buy if they were able to find equivalent accommodation that was affordable in the rental market.
According to Eurostat (the European Commission’s statistics bureau) the UK now has more people renting than in Germany, Austria, Switzerland and Denmark – and, at 36%, is level with France.
The older generation may see a benefit in renting, too. Retirement homes on assured tenancy can provide the occupants with care and protection.
Selling to rent can also free up much needed cash for a better lifestyle – and also have an Inheritance Tax (IHT) benefit. If you own a property when you die, especially if you live in London and the South East, that asset alone is almost certain to take you above the IHT £325,000 threshold.
By selling up, substantial amounts can be gifted to children and grandchildren and, provided the donor lives for another seven years, those amounts will not be part of their estate or liable to IHT.
Some may be reluctant, having waited so long to get on the property ladder, to jump off again – but there are definite signs that renting does have its attractive side.
The value of shares and investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage. This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.
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