How Equity Release Could Help Aspiring Homeowners onto the Property Ladder

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A few years ago, my wife and I found ourselves in a departure lounge at Sydney airport, reflecting on our splendid five-week journey Down Under and wondering what might have been had we visited 25-30 years earlier.

“Adelaide, the City of Churches, could be my home,” pondered my wife – Clare. “It’s cultured, effortlessly sophisticated, and surrounded by parkland. It’s just my kind of place,” she remarked.

I was partial to Perth. The world’s most remote city had a lot to offer, but if needed, I could have certainly adapted to life in Adelaide.

As we relaxed with a drink, we revelled in our successful journeying from west-to-east of the nation – that was planned meticulously and executed via rail, car, and a few domestic flights, was thoroughly enjoyable. With each passing moment, we became more aware of the opportunities this vast, welcoming, sun-drenched, sports-loving country presented.

If we had had the chance to visit Australia in the early nineties, for instance, we’re confident we would have seriously considered settling down there permanently. That didn’t happen, but when we finally got there, Australia was a delight.

However, as we journeyed across this expansive country, a few drawbacks became evident. Property prices in the cities were often staggeringly high compared to the UK. Even three years before we noticed a significant increase in our local cost of living, it was clear that Australia was already a costly place to reside

Earlier this week, I revisited a list of highly subjective advantages and disadvantages after learning about the Western Australian government’s efforts to attract more British professionals such as nurses, police officers, and teachers.

In February, Paul Papalia, the Police and Defence Industry Minister of the Perth-based government, initially enticed potential British expatriates. He highlighted the perks of living in Australia such as excellent cuisine, “wine regions”, and “coral reefs”.

He further stated: “Our salaries are higher, and our living costs are lower. Our healthcare system is top-notch. You will be well looked after.

“Many of our forefathers were transported from the UK to Australia as criminals. Now, not relocating would be the real crime.”

Undoubtedly, the Perth government’s recent initiative to fill over 30,000 job vacancies could appeal to many individuals in their twenties, thirties, and forties. After all, Australia – a land of sunshine, clear blue skies, shimmering oceans, and welcoming, well-kept cities – can seem like a contemporary paradise when compared to the UK.

However, one must not overlook Australia’s relatively high property market and daily living expenses, which are far from being considered affordable.

Keeping these factors in mind, it’s important to highlight a report released last week by the property website Zoopla. The report concluded that UK house hunters currently find themselves in a buyer’s market, where the average reduction from a property’s initial asking price is approximately £12,000.

Zoopla’s property index indicates that house prices have decreased by 0.5 per cent over the past year, and it predicts further ‘modest’ declines in house prices into early 2024.

The term ‘buyer’s market’ is likely to be pleasing to many individuals currently renting their homes. Such markets usually don’t last very long; indeed, the current market uncertainty may present a unique opportunity for prospective buyers to benefit from reduced property values, possibly with some assistance from their parents.

According to Zoopla, the average UK home is priced at £265,000; after deducting an average discount of £12,000, the amount needed to purchase it drops to £253,000. Despite this appealing discount, it’s a substantial sum for younger individuals to finance, particularly if lenders are hesitant to lend more than 75% of a property’s value; in this case, let’s say it’s £190,000. So where could the ‘missing’ £63,000 come from?

While it’s not exactly a mortgage fairy, the much-appreciated institution known as ‘The Bank of Mum & Dad’ continues to play an active role in helping their children step onto the property ladder. This is often achieved by tapping into the equity in their own property, which is likely to have grown over many years.

The latest data from the industry’s trade body – the Equity Release Council (ERC) reveals that during the second quarter of 2023, homeowners aged 55 and above released an average lump sum of £94,266, which is significantly more than the previously mentioned ‘missing £63,000’. Those who chose to release equity via a drawdown lifetime mortgage, which involves a smaller lump sum with regular future payments, released an average of £59,294.

Extended buyer’s markets are uncommon in the UK due to the traditionally limited supply of property. However, Mark Gregory, the founder and CEO of Equity Release Supermarket, the UK’s leading independent equity release firm, suggests there are four indicators of a buyer’s market, each of which is currently somewhat evident.

Mr Gregory explains that the onset of a buyer’s market is signalled by a noticeable increase in property supply or ‘inventory’ listed for sale. Like any other market, if supply rises without a corresponding increase in demand, prices will inevitably drop.

Following this, as supply continues to grow and demand weakens, properties begin to take longer to sell. Sellers who may be under pressure to sell or simply impatient if their property has been on the market for some time start ‘relisting’ their homes at lower asking prices.

“This process can accelerate, potentially leading to a series of reductions in asking prices, with the final selling prices significantly lower than their initial levels.”

“Lastly, and much less common in the UK compared to, for instance, the USA, there are incentives. Property sellers may offer enticing incentives to sell their home, such as agreeing to exchange contracts within a much shorter timeframe than usual, or by providing an allowance for renovation or decoration costs.”

These four characteristics can be observed in towns and cities across the UK, offering first-time buyers a relatively uncommon chance to step onto the property ladder, often with the assistance of the nation’s beloved bank – the one run by ‘Mum & Dad’. They also play a part, frequently by releasing equity from their homes which their adult children can use to finally end their monthly rental payments by purchasing their own property.

Equity release isn’t suitable for everyone: it can directly affect the value of an individual’s estate and may influence homeowners’ eligibility for means-tested benefits.

As autumn gradually envelops us with its predictably harsh weather, the warmth and sunshine of the southern hemisphere seem even more appealing than usual. While Australia’s climate is undoubtedly alluring, so too is the UK’s property buyer’s market.

Categorised in: Equity Release
This post was written by Mark Gregory