Will you give your kids a leg up on to the property ladder?
EVERYONE knows that having children is a lifetime commitment. That commitment is growing and growing because we are all living longer.
There's the emotional responsibility that never goes away, even though young Jack is now aged 35 and married with two kids. Worrying is part of parenthood and you have to learn to live with it as best you can!
Now a parent's financial responsibility is going the same way. Children are expensive to bring-up, especially if the education process includes a public or private school and university.
But that appears to be just the beginning in today's world as workers in the 20s and 30s struggle to get on the housing ladder.
Parents approaching retirement are faced with a choice. Let the children return to the home while they try and save the necessary deposit for a house – or front up with the deposit to give themselves some privacy!
The rise in house prices is unrelenting. In London the average property costs close to £500,000 - up over £200,000 in the past decade. Even the average home in England and Wales has increased by almost £20,000 in five years.
There have been plenty of government schemes to try and improve youngsters' chances of buying into property, including the recent Help to Buy; but little seems able to halt the rise in prices or increase the supply of suitable housing.
According to the Halifax, the average price of homes being sold under government schemes designed to help first-time buyers is £189,786, actually higher than the national average (£187,302). Those in London buying through affordable schemes pay £323,148 on average.
According to Shelter, each year a 100,000 fewer homes are built than are needed.
The average age of first-time borrowers in the UK is 30 – in London and the South-East, it is 32. The continuing rise of the house price is reflected in the various components required to get a mortgage and purchase a house over the past 30 years.
Interestingly, one of the big changes has been the deposit required; in 1985, it was 5 per cent or around £1,000; in 1995, it was 5 per cent and around £2,000; in 2005 it was 10 per cent or just over £11,000. Today what is needed is 25 per cent or over £25,000.
The average mortgage required 30 years ago was £19,000, 20 years ago £38,000 and, 10 years ago, £100,000. Now £123,000 is needed with a salary of £37,380.
The Institute of Fiscal Studies (IFS) has recently produced figures which show the balance of wealth has switched dramatically to the old, increasing the gap with young to a canyon.
One statistic really highlights the change. In 1994, 60 per cent of 30-year-olds owned a home, just three percentage points below the total of 65-year-olds. That gap has grown to 46 percentage points, with 80 per cent of those aged 65 owning a property and only 34 per cent of those aged 30!
Data from Pricewaterhouse (PwC) shows that 71.8 per cent of that 80 per cent own their own home outright with no mortgage borrowing.
That's the bad news for the younger generation. The good news is that the older generation are not hoarding their cash and have been releasing equity from property in record amounts.
It had been expected that savers would be accessing their pension pots because of the new regulations that came into force in April; perhaps this has also given them a taste for tapping into the equity in their homes.
The Equity Release Council (ERC) estimates that £4.2m a day is being taken out of property. £710m was the total of equity release in the first six months of 2015, the largest ever; of that £285m was taken out through lump sum lifetime mortgages and £425m through drawdown lifetime mortgages.
The chairman of the ERC said: “There is no doubt the pension freedoms have created more options for people to consider, but the appeal of tapping into housing wealth is on the rise as older consumers seek to make the most of all their assets at their disposal.
“Doom and gloom often surrounds discussions on retirement income, but, while contributions to pension pots remain low, an entire generation of home owners have been paying into property their whole lives, making it an asset that can transform their financial options beyond the age of 55.”
Some are using the property withdrawals to top up their pensions – or help their children or grandchildren make that property move.
Taking money out of your home, especially through equity release is relatively simple, which is why no such move should be made without the expert, specialist advice of an independent financial adviser (IFA).
The implications of taking out an equity release loan and letting the interest roll over can have a crippling impact of your property asset and what you are planning to leave when you've gone.
If you borrowed £100,000 on a house worth £400,000 and lived for another 20 years, the debt would almost wipe out the value of the house. On average, the debt doubles every 10 years.
Recent research by the insurance firm LV showed that 35 per cent of us are relying on an inheritance to secure our financial future. Unfortunately, that research indicated that not all of us are generous, with 28 per cent of pensioners polled revealing they weren't planning to leave much to their children - and 20 per cent claiming they would much rather spend it first!
:: Darren McKeever (dmckeever@ wwfp.net) is Northern Ireland adviser of Worldwide Financial Planning, which is authorised and regulated by the Financial Services Authority. For a free, no obligation initial chat about your individual finances, call 028 68632692, e-mail info@ wwfp.net or click on www. wwfp.net. Follow us on Twitter: @WorldwideFP.