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How can millennials get on the property ladder?

There’s been a lot of talk in the press recently about generational inequality, which has mostly been with good reason. Those currently in their twenties and thirties are earning far less than people the same age did 10 to 15 years ago.

The 2008 recession has put the millennial cohort far behind in terms of earnings and wages. Wages have never fully recovered since the recession and are still behind their pre-financial crisis peak. Many may be unable to ever afford to get on the property ladder, meaning they will have a lifetime of rent payments to fund.

Also, rising house prices have meant that the average deposit has risen from around £10,000 in the Eighties and Nineties to between £50,000-60,000 today, according to analysis by accounting firm PwC. Even when adjusted for inflation, the rise is dramatic.

Auto-enrolment in pension schemes has begun to address some of the long term issues around retirement funding but even still, these do not compare to the security offered by ‘gold-plated’ direct contribution schemes.

The younger generation are already aware that they will have to work far longer. Early retirement will likely be the premise of the rich, lucky or extremely frugal. Fortunately, millennials look set to be able to cope with the demands of a longer working life. The younger generation are fitter and healthier compared to previous generations with far fewer smokers and better diets.

Although a longer working life might be a path towards an eventual retirement, it does little to help young people get on the housing ladder. The fact of the matter is that many young people will need some kind of ‘leg up’ if they are to achieve the financial stability that many of the ‘baby-boomer’ generation managed.

The income gap between older and younger generations means that many young workers will have to rely on the wealth accumulated by their parents and grandparents if they are to sustain the same quality of life.

Family loans have become increasingly important for the financial wellbeing of young people. Many are giving younger generations so-called ‘early inheritances’ in the hope that such loans will enable them to get a foot on the property ladder. This is already so widespread that nearly eight out of 10 first-time buyers in London are receiving some sort of financial help from their parents.

Parents and grandparents are funding help through a variety of means. Almost three quarters of parents used their life savings to help out with the cash, while a third downsized or released equity from their homes. Another third accessed pensions cash; either cashing in lump sums through income drawdown or annual annuities. 7% remortgaged and 6% took out a loan themselves.

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Sources
Sunniva Kolostyak “Fireworks for millennials” in Pensions Age, November 2018
https://www.telegraph.co.uk/personal-banking/mortgages/baby-boomer-vs-gen-y-homebuying-in-1982-compared-to-2016/

Property – Good buy? … Stick to the fundamentals

After rising strongly for several years, UK house prices peaked in the latter half of 2007. Property prices in many parts of Britain had grown at an impressive rate, and some had stunning gains. On the other hand, those looking to trade up saw their profits from one house absorbed when they bought their next property.

Since those heady days, the UK housing market has slumped, proving that an investment in property is not a ‘get-rich-quick’ strategy. Indeed, we are unlikely to see the same sensible long-term investment if certain rules are followed and, in particular, expectations about possible profits are realistic.

In a slower market, it is even more important to choose property in a strong location and to manage your budget carefully. Choosing the right mortgage is essential. Many people are offered a high-street loan that appears to be a good deal, but has expensive fees or locks-ins that are part of the small print. An adviser can help to assess your individual circumstances and recommend a mortgage that offers sustained value for the long term. Although you will not want to review your remortgage options when discounts have lapsed, it does not always make sense to move your mortgage, as a move can incur fees and other charges.

Aside from your own house, the buy-to-let market is also worth considering. However, rising defaults amongst buy-to-let borrowers have made it much harder to find a buy-to-let mortgage, and lenders now insist on larger deposits – generally at least 25%. Oversupply in the market has also put downward pressure on rental incomes, making it harder for landlords to keep up with mortgage payments. Meanwhile, falling house prices have meant that some buy-to-let investors have found themselves mired in negative equity.

Most experts – and indeed homeowners – believe that UK property market remains its long-term growth potential, whilst accepting that future returns are likely to be lower than before. Nevertheless, as demand for housing continues to grow and migration into the UK continues to expand, there are compelling reasons why property will remain an attractive long-term investment. The challenge is to make sure your repayments are affordable so that, if interest rates rise or inflation takes hold, you are still able to meet your monthly mortgage payments.

And as most people know … YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE