Blog Archives

Why Clegg’s pension pronouncement is wrong for property

25.09.2012

We try and steer clear of politics in this Blog as it’s supposed to be about mortgage lending and all matters related. But on occasion, politicians have been known to suggest daft things that, if implemented, would have an impact on the housing market. Nick Clegg’s recent pronouncement suggesting that parents and grandparents should be dipping into their pension pots to help their children or grandchildren onto the housing ladder is a very good example of this.

There is very little detail, surprise surprise, so it is not easy to dissect exactly what is being proposed. As we understand it, Clegg is suggesting that some of the tax-free lump sum – equal to 25 per cent of the pension pot – the parent expects to take on retirement could be used as a guarantee to help a family member get a mortgage. The Lib Dems expect that only those with £40,000 or more in savings would be likely to take part. If we use a £40,000 pot as an example, that would equate to a lump sum of £10,000, so we are not talking about a great deal of money.

While £10,000 towards a deposit would no doubt be useful, what of the pensioner who is parting with a significant proportion of their retirement income? £40,000 doesn’t buy much of a pension as it is. Clegg is suggesting that even those pensioners who are not wealthy could dip into their retirement income to help out their offspring. Yet not that long ago the government was telling us that we need to save more for retirement, which is the idea behind auto-enrolment in pension schemes. Now it is being suggested that the money we do save could be used to prop up the property market.

It is all a bit confused, particularly as it is already possible to take the lump sum from the age of 55 so highly likely that many parents and grandparents are already contributing some of this towards their child or grandchild’s deposit fund.

Many people already see property as a pension, whether it’s their own home, a second or holiday home they let out, or a buy-to-let. To muddy the waters by suggesting that money saved in a pension should also be ploughed into property runs the risk of making that classic investment mistake: putting all your eggs into one basket.

More needs to be done for first-time buyers. Parents are already using savings and equity in their own homes to help with deposits. Dipping into pension pots as well? That could create a whole other host of problems.

Jonathan Harris
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Jonathan Harris

Funding threat to the ‘improve not move’ brigade

06.09.2012

The Government hopes that its proposal to relax the planning laws, making it easier to add a conservatory or extension, or do a loft conversion, will boost the economy. Rules on shops and offices expanding will also be relaxed as part of the scheme. But it’s not so much planning that’s the issue – for most people it’s lack of finance to pay for the building work.

It’s all well and good suggesting that the answer to the housing crisis is to extend existing homes but unless you have got the £20,000 upwards to pay for it sitting in your bank account, there could be funding issues.

Lending is tougher than before the downturn so getting your mortgage lender to advance the required funds will not be as easy as in the past. Lenders will look at the overall loan-to-value (LTV) once the extra funding is factored in: higher than 75 per cent, and the lender may well refuse the extra borrowing. So those borrowers with plenty of equity in their homes may be ok, but those who have a high LTV already may struggle.

Those borrowers who are enjoying the cheapest mortgage rates may also find that not only will their lender not lend the extra money at the same preferential rate, but that it insists that all the borrowing is remortgaged onto less attractive terms.

On the commercial side, the potential to develop more easily will be attractive to those who can access the necessary funding. More lenders have moved into this space in the past couple of years, including a number of bridging lenders, so there are increased funding options. We may see more investors taking a punt on a commercial purchase with the idea of developing and extending the building but specialist advice will be crucial to access funding options.

We welcome any move that might boost the economy and bolster the housing market at the same time. But borrowers should seek advice to ensure they are financing any project – whether it’s a residential or commercial deal – in the most cost-effective way.

 

 

Adrian Anderson
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Adrian Anderson