Climbing the Housing Ladder to retirement?

Harry_Powell

I was having an interesting discussion down the pub tonight with a friend of a friend who has just taken a huge leap up the housing ladder. I was stating how worried I would personally be taking on all that debt (we're talking £300k of mortgage debt). His retort was that it's one fo the few ways an ordinary bloke could make enough money to retire on.

His thinking was that most other 'investments' were taxed or had management costs, or both:

BTL: Management fees, void periods, income tax, maintenance costs, capital gains tax on any profits on sales.
Shares/Funds outside ISA/Pension: Stamp duty & broker fees on purchase of shares, annual management charge on funds, capital gains on profits.
Shares inside ISA/Pension: Stamp duty & broker fees on purchase of shares, Annual Management charges on funds & some S&S ISA accounts, restricted access to funds in Pension, restricted investment amount in ISA.
Own Home: Legal costs on purchase, interest on mortgage loan, tax free gains when downsizing.

I'm still unconvinced about the relative merits of Ladder Climbing against other investment opportunities, but his statement that a home was "an investment that you can enjoy every single day" sounded nice. How much I'd enjoy having that much debt around my neck is dubious though.

My aquaintance has two young children and was planning for a third. He's therefore looking to buy large family homes with a decent amount of land. Once the kids leave, he'll be looking to downsize to a place adequate for him and his wife.

I guess the equivalent of this for myself (we don't want kids) would be to move closer and closer to Zone 1, with increasingly luxurious property. Then to sell up and move to the 'burbs when we retire.

I can see it's appeal within the framework of existing ISA/Pension investments but I wouldn't like to put all my eggs into one basket the way he seems to have done.

Have any of our older members done this? Did it work out well? Are any of the younger posters working towards this? How's it going?

Bonia77

I don't get it...
Of course there are extra costs: the upkeep cost of a large 5-4-bed detached with 3-4 bathroom is much higher than cost for living in a 2-bed terrraced.

This includes energy bills, higher council tax, cost of maintaing teh house in a good nick, like decorating, bathrooms or even changing a boiler.

If you have a large plot of land, the lawn doesn't cut itself, the garden doesn't grow by itself. So you either do it yourself or pay someone ;-)

Really2

Bonia77 wrote: »

I don't get it...
Of course there are extra costs: the upkeep cost of a large 5-4-bed detached with 3-4 bathroom is much higher than cost for living in a 2-bed terrraced.

This includes energy bills, higher council tax, cost of maintaing teh house in a good nick, like decorating, bathrooms or even changing a boiler.

If you have a large plot of land, the lawn doesn't cut itself, the garden doesn't grow by itself. So you either do it yourself or pay someone ;-)

From experience,

Heating yes slightly higher (but we still run our home on the same energy consumption as our old 3 bed semi, energy is age dependant).

Decorating bathrooms, are no different as you don't use the rooms as hard so they don't "wear" as highly like they do in a small house. Also cost of replacing boilers etc is about the same.

The only big increase in cost is council tax and obviously the mortgage but apart from that there is no major difference.

Harry_Powell

Bonia77 wrote: »

I don't get it...
Of course there are extra costs: the upkeep cost of a large 5-4-bed detached with 3-4 bathroom is much higher than cost for living in a 2-bed terrraced.

This includes energy bills, higher council tax, cost of maintaing teh house in a good nick, like decorating, bathrooms or even changing a boiler.

If you have a large plot of land, the lawn doesn't cut itself, the garden doesn't grow by itself. So you either do it yourself or pay someone ;-)

I mentioned council tax and my mate correctly pointed out that once you get into the last band, the prices are the same. In my area, Hayes, the bands are as below:


CTax ---Local cost --National average
Band A -£948.50 ----£943
Band B -£1106.58 ---£1100
Band C -£1264.67 ---£1257
Band D -£1422.75 ---£1414
Band E -£1738.92 ---£1729
Band F -£2055.08 ---£2043
Band G -£2371.25 ---£2357
Band H -£2845.50 ---£2829

So a reasonable 4 bed detached in band G has a council tax of £474.25 per year less than someone who lives in a 40 bed mansion in band H. Ok, 40 bed mansions are a bit thin on the ground in Hayes, but you get my meaning.

I hate gardening too, hence my house has a 'courtyard' garden (block paving and a few pots ). My aquaintance reckoned that he loved gardening and with such a massive mortgage he couldn't afford to go out, travel, etc. and didn't have a hobby like golf to consume his time and so would have ample time to potter about in the garden.

Similarly, with the maintenance, unless you decide to remodel the whole house, it's not that much more expensive to maintain a larger house unless something structural happens and then that would be covered by insurance. I'd imagine that there isn't a huge disparity in boiler prices from one that serves a 4 bed house and one that serves a 6 bed house? Also, often a more expensive house is often dependant upon the location rather than it's size.

p.s. I'm just playing 'devils advocate' here because I agree with your points and raised similar ones over the beers.

silvercar

I can see the logic in spending what would be spare cash on mortgage interest where you will enjoy the benefit of it 52 weeks a year, rather than taking one or two extra holidays each year.

For me your pal's logic is more of a fall back position. We want a larger style house & garden because the kids are growing up and we can all enjoy the extra space. We also feel we can afford the mortgage. Come retirement, ideally we would stay in the home, mortgage free, so that the kids can remain at home while they save deposits for their own houses and then in time grandchildren can come to stay

If we need to downsize either to afford retirement or because maintaining the house is too expensive, then I would hope that our home would have proved a good investment.

CLAPTON

your friend is essentially correct but for entirely the wrong reason

the reasons that buying a large house is likely to give you a higher value asset that buying shares after 20-30 years is largely the effect of gearing

so today I can buy a house for 300,000 with a large mortgage
in 30 years time is may be worth say 10 times that i.e. 3,000,000

now suppose I want to buy shares... no-one will lend me 300,000 to buy shares so I can only buy a modest amount lets say 10,000 : so even if they rise in price by 10 they will still only be worth 100,000 in 30 years time

obviously you will need to fill in a lot of details but in essence that's why property to live in has been a very very good investment.

peterg1965

I can see the logic of your friend's game plan. However, making it work would depend on a number of factors; primarily I would want to have confidence that I was in secure employment, with the prospect of my salary going up each year (increments and annual pay increases) which would make the debt easier to manage. Age, number/age of kids/wife's employment etc would also be a factor.

I would also consider a house as part, a key constiuent though, of my retirement portfolio, there is still merit in traditional pensions, with tax relief being an advantage and also generating a nest egg/emergency funds through ISAs etc. I would be reluctant to put all my eggs in one basket.

I would also want to consider a 'back pocket plan' to escape the debt quickly if the worse happened. To achieve that having sufficient equity, as a buffer, to achieve a quick sale, perhaps in a declining property market, would be key.

If it all works out though, its a great way to ensure your retirement is very comfortable!

HammersFan

In my experience people who have pushed themselves to get bigger houses every 4-5 years (or less) have done really well by the time they get to retirement. The actual figures would take quite a lot of working out, but even given modest rises in house prices it would seem to be a reaosnable strategy.

mr_fishbulb

HammersFan wrote: »

In my experience people who have pushed themselves to get bigger houses every 4-5 years (or less) have done really well by the time they get to retirement. The actual figures would take quite a lot of working out, but even given modest rises in house prices it would seem to be a reaosnable strategy.

Every 4-5 years you have:

Estate agent fees ~ 1-2%
Stamp duty - 3-4% once you're on a high enough level, but at least 1% for anything over 125K
Conveyancing, survey, searches, HIPS, removals, re-mortaging fees, etc, etc.

Their big house may be worth a lot, but people seem to forget about the costs incurred along the journey of getting to it.

Really2

If you do want to do such a thing it is best not to over do it.(in terms of debt/cost to service)

We only purchased a big house because we wanted the space for guests and and this is the main reason because we could afford it.
In reality our first house was right at the bottom of our affordability simply because you worry as it is a major thing taking on a mortgage.

Now we have a mortgage on about 3.3X joint wage (wife is part time) and to us that is not at all over extending ourselves.

But as with any mortgage build up a good cash buffer and insure your income just in case the worse happens.

I would rather spend a few hundred more on my house than spend it on nothing personally.
I suppose I could have invested the extra cash and not moved up but it is something we wanted to do, and we are enjoying it.
I would have never done it as just an investment though, I think you could end up making some wrong decisions if you only view your house as that.

Really2

mr_fishbulb wrote: »

Every 4-5 years you have:

Estate agent fees ~ 1-2%
Stamp duty - 3-4% once you're on a high enough level, but at least 1% for anything over 125K
Conveyancing, survey, searches, HIPS, removals, re-mortaging fees, etc, etc.

Their big house may be worth a lot, but people seem to forget about the costs incurred along the journey of getting to it.

How do you incur them if you have already purchased it?

those are one off fees not every 4-5 years.