UK homeowners could end up £326,600 wealthier than people who rent over a 30-year period, even without rising house prices, the Equity Release Council (ERC) has revealed.
In a new report, the ERC highlights how homeowners can gain this significant financial advantage by making lower monthly payments than renters, and building up their housing equity.
A survey of 5,000 adults for the Council found that 32% of homeowners see their mortgage as an investment, while 48% with an existing loan said that they can save more because their payments are cheaper than renting.
However, the ERC warned of lifelong inequality for those who are unable to get on the property ladder, with 54% of survey respondents who had not yet bought a home saying it is “unrealistic” they ever will.
The findings also show that 68% of homeowners feel confident about their financial future, compared with just 45% of adults who do not own their own home.
“For those who manage to buy their own home during their working lives, the extra confidence and flexibility this provides will be even more critical to their financial wellbeing than it is today,” said David Burrowes, chair of the ERC.
“While today’s homebuyers are borrowing larger sums for longer, they are also building considerable equity which can help meet future needs for themselves and their families.”
The £326,600 figure calculated by the ERC assumes average rent rises of 2% each year, and that the homeowner, having initially taken a 95% loan-to-value mortgage on a £220,000 home, remortgages onto a 90% and then 75% loan once capital repayments have increased their equity.
The analysis also shows that continuing low interest rates and investment returns will make it very challenging for future retirees to build an adequate income, as people face more individual responsibility to save for longer lives in a less secure job environment.
For every £1,000 the average employee earns in their final salary before retiring, the ERC said that they can expect just £150 from a defined contribution (DC) pension, compared with £670 from a defined benefit (DB) scheme.
The report underlines how homeownership underpins greater financial security in later life, by building an asset that can be realised through downsizing, using a lifetime or retirement mortgage or a combination of both.
It calls for greater education about the options and benefits of property wealth, further product development to reflect changing consumer needs, and urges the government to follow up on its pledge to “help generation rent become generation buy”.
“Perceptions of debt in later life are changing, and property wealth is transitioning from having been the ‘emergency fund’ to an enabler of life ambitions and financial goals,” Burrowes continued.
“This fundamental shift means products, advice, policy and financial education must also keep evolving, so more people can savour the experience of longer lives.”
Image credit: iStock
Author: Chris Seekings