Comment: Discouragement to downsize is stifling market

One of the main consequences of draconian rates of Land and Buildings Transaction Tax (LBTT) on high-end residential property purchases has been reduced opportunities for growing families to upsize. Until the current rates were introduced, “downsizing” by older home-owners living in properties that – their own children having flown the nest – were much too big for them meant there was a steady supply available for younger home-owners travelling in the opposite direction.

Opportunities to buy spacious, high-end properties have certainly diminished, says Alexander. Picture: contributed

But with so many potential upsizers unwilling to pay substantial sums in LBTT and potential downsizers unwilling to reduce prices to accommodate this, opportunities to buy spacious, high-end properties have certainly diminished.

Now it would appear there is a new discouragement for older home-owners to downsize – the temptation of equity release. Typically, equity release allows home-owners to secure a capital sum by transferring the rights to part of their property to an equity release company. Interest is charged on the money on a rolling basis and is only paid back (with the capital sum) when the owner dies or has to go into permanent residential care.

Since 2016, the equity release market has been growing at an average rate of 7.1 per cent each quarter. The amount of equity unlocked from people’s homes more than doubled from £514 million in the second quarter of 2016 to almost £1.1 billion in the final quarter of 2018. That year ended with a record £3.9bn of equity release lending.

A Canada Life survey found that 44 per cent of people said clearing an existing mortgage was why they took out equity release – the biggest single motivation. The second most popular was making improvements to their properties “to generate more value and enjoyment”. Others included gifting money to children and grandchildren (often to help secure a house deposit) or simply ticking off a bucket list of holidays and other experiences.

As someone who believes in free markets, I am all for this option being available to home-owners, especially those in later life who may have mediocre pensions and for whom the equity tied up in their property is the only other available source of income and a tempting route to more secure – and enjoyable – sunset years.

However, financial schemes with advantages rarely come without disadvantages and equity release does have these. Rolling interest adds substantially to the original capital sum paid out to home-owners; for example, money borrowed at 4.5 per cent means the sum outstanding will have doubled in 16 years. An equity release arrangement does not, in itself, prevent property-owners from moving home at some later stage but it certainly restricts their financial ability to do so. Also, some older people who are “equity-rich, cash poor” (living in a high-value property with a minimum of income) may find that access to cash through equity release means they will no longer qualify for existing health and welfare benefits.

As for my earlier reference to markets, to be really free a market has to be equitable; consequently government needs to act to ensure that the pros and cons of taking out equity release or, for example, downsizing, are set on a level playing field.

Should an older couple decide to downsize then the buyers would be required to pay LBTT. However, an equity release arrangement – which is, in effect, the deferred purchase of part of a home – is not subject to any property-related tax. If this deferred purchase involves, say, 25 per cent of the property’s value, should the equity release company not pay one quarter of the LBTT that would apply if the property was sold on the open market?

This, of course, would tip the scales against equity release for some home-owners and consequently encourage more to downsize. As this would loosen the housing chain and provide more opportunities for younger families to upsize could it be such a bad thing?

- David Alexander is MD of DJ Alexander