Growing tend in UK property equity release gives rise to concerns

A growing trend among UK pensioners applying for equity release mortgages is causing concerns with at least one financial adviser. Bristol-based adviser Hargreaves Lansdown believes that Brits who are looking to rely on equity release mortgages to fund their retirement plans are not being realistic about how to finance their future needs.

Huge rises in UK house prices has resulted in a generation of pensioners in the UK having large amounts of equity in their property. Given that pension amounts over the same period of time have performed poorly in comparison, growing numbers of pensioners in the UK are electing to withdraw the equity they have in their property, via equity release mortgages, and to use the proceeds to fund their retirement.

This has lead to a number of middle-aged people in the UK believing that a similar reliance on property investments will be preferable over investing in alternative long-term pension schemes. However, Tom McPhail, head of research at Hargreaves Lansdown, disagrees and argues that in fact this could be a very grave long-term financial mistake.

McPhail argues that the massive increase in property prices in the UK over the past two decades has been fueled by a shortage of available properties. While this may be benefiting UK pensioners looking to fund their retirement today, McPhail says that the combined factors of an aging population along with the additional housing being constructed will mean that, in the long-term, there will be a growing number of people looking to release the equity in their home but with far more housing available.

The net result of these two factors will likely mean that the housing shortage in the UK will disappear and a correction will take place in the UK housing market that will mean a sharp reduction in the equity value people have in their homes. Thus, in the long term, those looking to fund their pensions in the UK via equity release mortgages will be facing diminishing returns. Far better, McPhail says, is that middle-aged people in the UK look to alternative means of funding their long term pension needs, such as with private pensions and ISAs.

Commenting on his remarks, McPhail said that: "Property is not a one-way bet. The demographic pressure will eventually give way. Betting your retirement security on property is a very high risk strategy."

Richard Smith
2nd March 2007

 

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