From all previous posts I don’t think we at property know have ever talked about property for the older generation. If you’re over the age of 54, your property is most likely to be your biggest asset, if some of you readers are living in the UK you may have seen advertisements about releasing equity from your property, these sorts of advertisements are getting ever so popular recently. Now you might be asking what is equity? Equity is the market value of ones property minus the liability attached to the property which is generally a mortgage. Nowadays homeowners are given an opportunity to use equity release schemes to enable them to gain access to the equity in their property and then they can spend that money. The money can be paid as a lump sum, spread out over a period and used as a monthly income or used to buy annuity that will pay an income for life (for older homeowners looking for retirement). Providers of the schemes are fully regulated by the financial services authority, as are the brokers who give advice about equity release. The schemes available are home reversion plans and lifetime mortgages. Whichever scheme is chosen, you will be guaranteed the right to reside in your property until you sell the house, move into long term care or you die.
A lifetime mortgage is a mortgage secured against your property with no repayments to make until you move out or die. The advantages of using this is that you and your spouse (I am not to sure on civil partnerships at the moment) still own your property and will benefit from any increase in property value. Also if a “no negative equity” guarantee is implemented this ensures that regardless of what happens to house prices or interest rates, the final debt that needs to be repaid will not exceed the sale value of your property. But the downside is because none of the debt will have been paid during your lifetime, the interest will roll up for as long as you live in the property. The interest and original sum of money you borrowed will eventually have to be paid back by your property.
A home reversion plan unlike a lifetime mortgage is not a loan. You yourself will actually sell or a share of it to the equity release provider while at the same time retaining the right to live in the property rent free for the rest of your life. The advantage of this is that as it is not a loan there is no interest to pay. When the property is sold, the company will take a percentage of its value, if you sell 50% of your property then your estate is guaranteed to receive the other 50% of the property value as inheritance. The downside to his is since you will be still living in the property the scheme provider will not offer full market value for the percentage you are selling. If you die immediately after taking out the scheme you will have sold your home for far less then its worth. The amount offered for your share of the property will depend of your life expectancy. The greater your life expectancy, the less you will receive.
A rocky road ahead, like most of us predicted the housing market is slowing down, the property craze seems to have run its course and the bubble is about to burst. For many of us we have witnessed a turn in the economy. With the current economic situation in terms of the credit crunch it is affecting mortgage lenders there is no question about that. The credit crunch in the US has had a huge effect in the UK, there have been stricter controls to whom banks lend to, there has been a steep drop in mortgage lending, with less than 3000 products offered to consumers today compared to May 2007 in which there were as much as 11,000 products. This has made it increasingly difficult for first time buyers to get on the property ladder as they will have to save a lot more for deposits or wait till they get a better paying job but waiting for that could be too late. As more of us are watching our spending carefully, there seems to be fewer buyers out there and this will eventually cause an excessive supply of homes with a lack of demand, which could result in the price of properties continuing to fall dramatically.
Another blow to our pockets is the intensity of the cost of living, noticeably the price hikes in everyday essentials such as petrol and food, with this in mind many of us are holding back, that means stepping away from the property market, keeping every penny in our pockets and being extremely conservative with our spending. It looks set that the UK is about to follow suit of the Americans and possibly head towards a recession.
Although the government has tried to stimulate spending within the economy by cutting interest rates to 5%, this may not necessarily improve the situation within the property market for home owners. Reduced interest rates as well as declining house prices, has not boosted spending or maintained property value which has had a knock on effect on the wealth effect in which people perceive themselves to be richer but in this case are worse off, in which case the wealth effect is playing in the opposite direction of the fall in house prices. An example of this is when, with a £100k mortgage and a drop of 0.25% in interest rates would lead to fall in monthly payments of £21. On the other hand a drop in house prices of 0.25% a month would lead to a loss of equity of roughly £250 on a £100,000 property. The home owner ends up paying £21 less then usual a month but the house price drops makes the interest rate cut redundant making the home owner lose equity in the long run.
With the current economic state, getting a mortgage has become incredibly difficult as lenders have become quite demanding to who they will offer mortgages to and when they do offer them, the rate will not be cheap. Despite this, its not all bad news, as property prices seem to be unstable, more people are turning to renting, this new trend has increased rental prices for landlords and seen the sales of buy to let market rise in the past few months.
Just recently it has been predicted that the number of properties sold in the UK this year will be at its lowest for 30 years. Which is approximately 30% lower then 2007.
This prediction was made by a housing expert by the name of Richard Donnell. He made this prediction as an uncertain housing market is bringing about many would be first time buyers to wait and observe the market in case prices drop even further. We all know that the market is stabilizing and not booming as it once was. Don’t get me wrong its not totally flopped but a friend of mines apartments market value dropped £40,000 in the space of 3 months, it’s a good job they were buying to live and not buying to let. With these gloomy forecast properties are staying on much longer then they used too regardless if they are excellent buys the market is just so unpredictable nowadays it just knocks all the confidence out of the most poised buyer.
Another recent announcement from the council of mortgage lenders to dampen our spirits, they are predicting that there will be a 7% fall in prices in 2008.These announcements are like air raid sirens in the property world, reading from a newspaper a home seller was just finding impossible to get any interest to sell. They had to reduce asking prices by 15% to even get the faintest of interest. Eventually when they did get interest potential buyers are just sitting back and waiting for more house price falls and cashing in when they get cheaper. This is proving to be effective for the buyers but for the sellers some just can’t afford to cut prices. With more people renting instead of buying its making sellers jobs harder ten fold, making properties on the market stay for much longer and some just not being sold at all. One estate agent believes that house prices will drop by at least another 5% this year.
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