According to the Equity Release Council’s 'Home Advantage' report, out today (August 18), the majority of homeowners (57 per cent) are interested in accessing money from the value of their property in later life.
The report highlighted how the shift away from secure jobs with long tenures to less secure employment and self-employment with greater job mobility was affecting younger generations’ pension incomes.
It found nearly half (49 per cent) of people surveyed in their thirties have already had five or more jobs in their career – almost as many as those in their sixties (55 per cent).
“Modern workers will have lower pension income on average than some earlier generations, increasing the need for other sources of funds,” the report found.
This is compounded by a growing number of thirtysomethings whose financial futures are developing a lot later than expected. Nearly half (46 per cent) of homeowners in their thirties have relied on financial help from family or friends for instance.
Stephen Lowe, group communications director at Just, said this highlighted how "powerful societal forces are shifting the landscape of retirement planning.
“These changes bring both threats and opportunities but there is a clear theme that equity release will have an increasingly important role to play in helping people plan for retirement and enjoy a better quality of life in their later years.”
With the UK base interest rate falling to 0.1 per cent in March 2020, a large savings pot is now required to support a set retirement income.
In 1991, the Bank of England base rate was 14 per cent and 10-year government bonds yielded more than 10 per cent. But at the start of 2021, the 0.1 per cent base rate meant the yield on 10-year government bonds had fallen to 0.3 per cent.
Pension incomes have also been affected by an increasingly ageing population, and the shift from defined benefit to defined contribution schemes as private sector employers become increasingly unwilling to shoulder the cost of reduced investment returns.
As a result, a significant gap between these types of pensions has emerged. For every £1,000 a typical employee received in their last annual salary, they could expect £670 from a DB pension in retirement but just £150 from a DC scheme, according to the ERC report.
For Lowe the UK is “rapidly approaching a time when this is replaced by the different outcomes for those who own their own home and those that don't."
He added: “For the mass market of 'Middle Britain' consumers, buying a home and creating equity rather than renting will have a profound effect on people's ability to meet their own retirement aspirations.”
The report estimated savings from getting a mortgage versus renting over a 30-year period stands at £326,214 today.
David Burrowes, chair of the ERC, reckons “there is no sign of the pace of change slowing down in the post-pandemic world” when it comes to the popularity of equity release - both as a supplement for declining pension incomes, and as a way for parents to help their children onto the property ladder.
“This [growth] looks set to heighten the role of property in supporting a financially secure retirement,” he concluded.
The housing ladder and IHT
As well as boosting pension income, other popular reasons for releasing equity included paying for care support at home, paying for holidays, and gifting money to younger family members - be that towards a deposit for their first home, or for other financial goals.
UK homeowners released £1.17bn of their property wealth in the second quarter of 2021, which the ERC said was spurred on - at least in part - by the stamp duty holiday.
Alan Lakey, director of CIExpert, also highlighted how equity release reduces the inheritance tax risk, "and parents can see their children benefit from their money whilst they’re still alive.”
Claire Singleton, chief executive of Legal & General Home Finance, added: "The recent freeze to inheritance tax thresholds until 2026, combined with this year’s steep rise in house prices, means that more properties could be nudged past the inheritance tax threshold.
"A lifetime mortgage will reduce the equity in the property, which therefore means either reducing the amount of IHT payable upon death, or means the estate could fall below the threshold completely."
But she added that in a climate of double-digit house price growth, younger generations getting on the property ladder without help from the bank of mum and dad can be particularly challenging.
“We are seeing a growing number of enquiries about how people can use their own property wealth to help loved ones secure their first home - we saw a 96 per cent rise in the number of enquiries about gifting money to loved ones in the first five months of this year, compared to 2020.”
The report found higher house prices and job insecurity were continuing to frustrate first-time buyers. The ratio of house prices to incomes has risen from 2.6 in the mid-1990s to more than 4.5 today.
While 62 per cent of homeowners in their sixties felt they bought their first home when they were “still quite young”, only 47 per cent of those in their 30s surveyed by the ERC felt the same.
Student debt was also a factor. Nearly one in four (22 per cent) 30 to 39-year-olds saw their student fees and lingering debt as major hurdles in getting onto or moving up the property ladder.
Young borrowers are facing stricter affordability criteria too, as increased mortgage regulation has led to stricter affordability demands and higher deposit requirements.
The report found "by far the most significant regulatory changes" came from the Mortgage Market Review (MMR), which was implemented in 2014 in the aftermath of the 2007/8 financial crisis.
The MMR required lenders to assess whether borrowers could meet strict affordability checks, based on future potential interest rate rises as well as today’s rates. The council said it had also made it harder for borrowers to access interest-only loans.
More broadly, the ERC said “decisive action is needed” to address the fact that, among thirtysomethings who are not yet homeowners, nearly half (49 per cent) already feel this goal is unrealistic.
Andrew Assam, mortgage director at Scottish Widows Bank, said: "Against the backdrop of rising house prices and increasing property wealth, the extent to which equity release market activity is used either to maintain living standards in retirement or facilitate the transfer of wealth between generations may play an increasingly important role in shaping of the wider economic recovery."
ruby.hinchliffe@ft.com
