We should link together the two biggest financial commitments most people ever make: buying a home and saving for retirement.
While the two largest financial commitments most people ever make are buying a home and saving for retirement; Unfortunately, many people—especially younger workers—believe that these endeavours are in conflict. Faced with what they consider to be an either/or decision, many younger workers prefer to save for a down payment on a home and put missing out on the compounding effect of early, long-term investing.
Allow first-time home buyers to borrow from their retirement savings to raise money toward purchasing a property. The loan could be made by the pension in favour of the member and secured by a 2nd-ranking charge on the property.
This proposal would create two main benefits. First, it would bridge the gap between the price of the property and the amount that a first-time buyer could afford to borrow. Allowing people to access their pensions to fund their first house deposit is likely to go a long way to solve the crisis faced by first-time buyers who are being priced out of the market. Second, it would raise the appeal of pension contributions amongst younger people who are reluctant to put away money for their retirement when they can't yet afford to purchase their first home. Allowing people to access their pre-tax pension contributions to purchase a property would make the idea of making pension contributions in the first place more appealing to younger people. It would also engender a culture of investing, rather than simple bank saving, at an early age.
Conditions / Assumptions: For ease and simplicity, assume that a fixed rate of interest applies—e.g., 2.5%—and that this is permitted to roll up. Incentives could be built in for people to repay the loan as early as possible (perhaps by applying a higher interest rate after a period of time, say 10 years). In any event, the outstanding balance would become due and payable upon the sale of the property, which would happen when the person is ready to move and upgrade.
Example: Kate wants to purchase her first property, an apartment worth £180,000 (including stamp duty). She is a teacher with ten years’ experience, earning a salary of £35,000. Her bank will lend her £140,000 (4x salary) and she has ISA savings worth £10,000, leaving her a £30,000 shortfall. She happens to have £30,000 in her workplace pension scheme. What if she could access her £30,000 pension savings to complete the property purchase?
Finally, this proposal differs substantially from existing schemes around the world. In Australia, one can invest pension funds in investment property but not in a personal residence. In New Zealand, one can obtain a grant from KiwiSaver, which is non repayable. In Singapore there is a similar scheme but it is not limited to the first time buyer.
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