When are these people going to get the 'real world'?
1) even if people have seen a capital gain on their house worth, if they are still living in the property, they cannot spend the money
2) even if older people have lower property costs, they have seen their other overheads increase substantially
3) many people don't have a pension, and it's hardly worth trying to get one, so all they have is their savings and the hope that interest rates will increase at some point.
I understand the rationale that they are trying to get people to spend Britain out of recession, but how irresponsible is that if they end up unable to keep themselves in later times, or times of need?
Actually you can raise money from your house. You can re-mortgage it or there are schemes where you can enter into an agreement with a finance company to retain a lifetime interest (or joint lifetime interest) in the property whilst selling the rest.
The latter arrangement is attractive to older owners particularly those with no heirs. They might just as well release some of the capital from their property and derive benefit and hopefully a little bit of luxury from it from it whilst they are alive.
The former arrangement is more attractive to others particularly those with immediate liabilities such as putting children through university for instance and future prospects of a pension lump sum, inheritance or endowment policy maturity.
It is of course a matter to be thought about very carefully. Things don't always turn out as expected.
IOW take out a loan. You can take out a loan without a house (though the interest rate may be higher).
Those schemes release surprisingly little money - it's not that they're a rip-off but simply that the interest (effectively) rolling up and compounding is very costly, and the finance company will want to make certain that the house sells for enough so will (or should) factor in potential drops in prices.
So a short term loan till you get a lump sum - fair enough. But that's not spending the capital gain on the house, it's simply using the house to get a slightly cheaper loan. Hardly the same scale of benefit as the BoE moron (and others) imply - that you can simply "cash in" the rise in your house price.
It just reinforces the warped attitude to house prices in this country. Basic common sense says that:
1) if something you need goes up in price, that's bad news
2) if something you own goes up in price, that's good news
3) if something you need *and* own goes up in price, that's pretty much neutral (although there may be peripheral advantages and disadvantages)
He isn't arguing that everyone should spend all of their savings. He's expecting a marginal effect only. And a marginal effect (for some value of 'marginal') is all that is required.
My issue was with his implication that people can simply "spend" the capital gain on their house. I guess he thinks people should have their cake and eat it...
Coming soon we have massive cuts in the public sector and a VAT increase. People are going to tightening their belt a lot more and jobs in the private sector will be at risk as profit goes down.
If I had some money I might spend it but at the moment any bit of spare cash I have goes into savings as I fear redundancy.
It depends what you want the money for. I certainly would not advise anyone to re-mortgage their home to take a world cruise for example. A few enjoyable weeks pass and then its all over but the debt isn't.
However, imagine you had an aged relative with modest assets who could no longer manage to live in their own home. Care home costs are high and it would not take long for them to eat away modest assets. You might therefore decide to extend your home to accommodate them (a granny flat perhaps) . You know that in so doing you are adding value to your house. You might in addition be able to look forward to a lump sum from a pension scheme and, terrible that this sounds, but the fact is your relative will not live for ever. Maybe you'll have a couple of insurance policies that will mature. You can sit down and make a pretty accurate assessment of when you will be able to redeem your new mortgage and how much it will cost you to keep granny happier through being near to the family and to protect your inheritance.
They don't make anything if you take out such a plan say when you are
They have an actuarial basis. Once you reach 70+ the yield increases exponentially. What's going to happen eventually if you do nothing? Is the house going to be sold and a few thousand each go to a collection of nephews and nieces who save for the annual Christmas card, you have not heard from for years? If this is the case and you fancy that dream holiday or a new set of windows and heating system or whatever then why should you not have them?
It is releasing the value stored up in the house. The financier would not let you have money on such advantageous terms without it's security. You use it (at interest) and benefit from it until the day you are in a position to put it back. This is fine provided you use it to acquire extra assets. You invest it (not in the Brownian sense) rather than consume it.
There are other ways you can release capital too. Downsizing for instance. I have an old mate who blessed with subsidised mortgage facilities every 2 or 3 years upgraded their living accommodation by moving into the most expensive house his employers would subsidise. You can imagine the house he had by the time he retired. Does he still live in his "mansion"? Of course he doesn't he now lives in a picturesque country cottage about half the size and price. The balance went into his already ample retirement pot thank you very much.
Another thing! The fact that I own and by now have paid off my mortgage means that I don't have to pay rent. I don't know what rent our house would command on the rental market but whatever it is, it's money I don't have to shell out and therefore is available to spend on other things like enjoying my final years on this earth.
True. But older people are more likely to want to downsize and release some capital. Indeed it is only people who downsize that actually gain from the ridiculous house price inflation of recent years.
Like everyone else then.
If they have plenty of savings then they can afford to spend some of it.
The problems with these schemes is that they don't allow sufficient draw-down. They give you a lump sum, say 50K up front, which you have to invest whilst not using it at perhaps 2%, whilst the finance company are charging you 7% immediately. Personally, I think that regulations for companies offering equity withdrawal schemes used for income supplement should require them to offer monthly draw-down facilities, with the interest accruing as the money is borrowed, as their ONLY option.
His comment was in response to complaints that people are getting low returns from savings. People whose only "savings" are the equity in their house don't expect to get interest on that and thus weren't the ones complaining.
Why would you need a new mortgage? The sale of Granny's house should pay for the extension, and that *is* cashing in the house (in part at least) rather than the "having your cake and eating it" as suggested by the BoE bloke.
There's nothing wrong with them in principle, they're a good idea if you have nobody to leave the house to. It's just they don't raise anywhere near the equity you have in your house. Even at 70 you'd be lucky to get much more than a third of your equity, much less if younger or if you're a couple. This lot have a calculator...
formatting link
People who do want to leave their house in their will, possibly to grandchildren who would struggle to buy otherwise, would need to think carefully before giving two thirds or more of their equity to a finance company in order to "release" the other third now.
SFW? It's still a loan, nothing more. It's just that the loan has a condition that the finance company can take your house if you don't pay it. In fact with *any* loan the finance company could end up taking your house - it's just that with a secured loan the lender is first in the queue.
Of course. The only real way to realise your capital gain. But the BoE guy wasn't suggesting that, I wonder why?
But I doubt he's typical - a few I know who always planned on downsizing ended up finding their ideal retirement bungalow costs about the same price as their large 4-bed house!
Yes, but what's that got to do with the price of fish? Buying practically anything (if you need it long term) is better value than renting it, whether it's your house, your car, your telly etc. Completely irrelavent to the issue we were discussing ie how to cash in your equity.
"Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested." .... Mr Bean said he "fully sympathised". But he continued: "Savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit." He added: "Very often older households have actually benefited from the fact that they've seen capital gains on their houses."
I know that's what he said. But I'm still interpreting it as a comment directed towards people who have already liquidated (some of) that capital, not to those who haven't.
ISTM he was saying "it doesn't matter that you're getting hardly any interest on your (cash) savings, because you've made a capital gain on your house".
But then he went on to say that people should be spending this capital to supplement the interest that they are not getting.
ISTM that only people who have substantial deposits would be trying to live off interest in the first place and further that the most likely place for this substantial deposit would be a liquidated asset
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.