Most people have this plan in life they work for a large (secure?) organisation, for 40 years or more, and then they feel that the organisation will repay their loyalty by providing them with quite a sizable top-up to their State pensions. How wrong can they be? Look at the chaos caused over the last few years on both sides of the Atlantic where companies have either illegally or by bankruptcy robbed hundreds of thousands of hard-working, loyal employees, their right to a comfortable retirement Murdock and Equitable Life in the UK; Enron, IBM and now Delphi in the States are just the tip of the iceberg. (Will GM be next?) Then there is another highly relevant issue that of long term care. In the UK particularly, human rights for older people remains a very uncertain area, and unless you have money or very vociferous friends and relatives, you could become victim of bureaucratic activities. As reported in the Telegraph Money section in February this year, a couple who had lived together since the beginning of the Second World War ( 65 years of togetherness) found that when the husband had to go into a care home, his wife was refused permission to move in with him. Enforced divorce by the Welfare state? Luckily the couples family rallied to their rescue, and Gloucester County Council relented and the couple are now reunited. What is the common theme in this reassurance that control of our twilight years will not be taken out of our hands by some faceless bureaucrat? Financial insecurity of course. In an attempt to overcome this uncertainty, many people are turning back to one of the bedrocks of financial security property. But to many average people, the thought of investing in property is seen as a privilege that only the very rich and therefore those totally unaffected by the pension crisis can afford to indulge in. However, many of these folk are already into property investment, and dont yet realise it. One thing most of us are brought up to believe is that we should, as soon as we are able, get a foot on the property ladder and buy our own house. But then it all goes a bit pear-shaped. Most of us live in this house we have bought, usually with a really low cost, long term mortgage, and we then have this urgent desire to pay off the mortgage as quickly as we can, so when we retire, we can live rent-free in our own property. That is what we are taught to do in school, by our parents, by society in general. Very commendable but what about our standard of living on retirement? Or our choice of care homes when the inevitable happens? We may have a nice house to live in, but if all of a sudden, we are only getting a fraction of our usual income, due to retirement or long term illness, what happens to the nice car, the good holidays, the freedom to go and see all the family when we want to? Over the lifetime of the mortgage the average property - wherever it is situated, has been increasing in value by around 8% every year. With the average price of a house in the UK now at 150,000, that represents a growth of around 12,000 every year. After 10 years, that will amount to some 120,000 (about $205,000 to our US cousins), so you could have at your disposal a lot of this money by refinancing your house. With the average deposit needed to buy another house as an investment in the UK being around 15%, and the average UK home costing 150,000, another house would require you to raise around 22,500 deposit, so in theory, you could go out and buy and 5 more houses using the equity in your existing house, and each house growing in equity by 8% (12,000 each per year), you would see your net worth grow by around 60,000 every year! Thats all good and dandy, but now you have 5 extra mortgages of around 127,000 each, each one costing around 550 a month to service. This is what most people find is still the most daunting, and even terrifying prospect, of investing in property. However, there are organisations around who specialise in locating property both in the UK and in places such as Spain where properties can be brought for very low amounts of money down, and for the uninitiated, full rental guarantees for up to 10 years can be provided in some cases. OK, there the trade off is that there would be little or no rental income, but the mortgage would be paid with no worries, and the capital growth after 5, 10, or more years would provide a very tidy capital nest egg indeed. But and there is always a But where there is money to be made, sharks tend to circle, and before anybody rushes out and starts to buy low money down property, they should seek sound financial advice from an independent financial advisor. Copyright 2006 Geoff Morris |
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