People are finding it increasingly difficult to get on the housing ladder, while at the same time many are also falling short in saving adequately for their retirement. This trend is leading to a growing number of people who rent in retirement which leaves less disposable income to fund the essentials, let alone luxuries.
The challenge for today’s “generation rent” is to save for both retirement and a mortgage deposit simultaneously. To address these significant societal issues, we must adopt a more holistic approach and explore integrated solutions.
Saving for a mortgage deposit while renting is out of reach for many and we know, at the same time, people need to save more for their retirement. And the picture gets worse when people apply for a mortgage as they are often disappointed with the amount that they can borrow relative to their income. This leads to people having to make compromises, either buying a smaller home that is less suitable, moving away from work, school, family and friends, or remaining in the private rented sector and struggling to save for a deposit.
This matters from a pensions perspective because a lack of home ownership is opening a fault line under the retirement security of more than a million pensioner households, according to research from the independent Pensions
Policy Institute. The analysis shows that the proportion of households who own their own home in retirement could fall from 78 per cent to 63 per cent by the early 2040s, while the proportion living in the private rental sector could rise from 6 per cent to 17 per cent, which could lead to 1.2m more households in the private rented sector.
The stats for first-time buyers tell a bleak story. Mortgage lenders will give first-time buyers on average, at most, three and a half times their income. But the average home in England is nine times average income. People need a substantial deposit to secure a mortgage but it can take 19 years to save the deposit for a home that people can comfortably afford to rent.
Millions of people can comfortably afford to rent the house that they want but are unable to get the mortgage to buy a similar home. Our approach allows regular families to buy a regular family home, helping people meet their aspirations and get on the first rung of the homeownership ladder without making difficult compromises.
The model is a hybrid of renting and owning. We call it ‘gradual homeownership’. This involves people buying the share of the home which they can afford in cash (a minimum of 5 per cent) and paying market rate rent (increased annually by RPI) on the share of the home that they don’t own. We encourage people to gradually own a greater proportion of their home, helping them get to a position where they either buy the home outright with a mortgage (with much greater equity) or move on. People take on some of the key benefits, along with the obligations, of home ownership, including making their home their own.
There is no debt, or any interest charged, in the model as the customer does not take a mortgage on their share, making it fully Shariah compliant. We have been told that this is the only way for Muslims to buy a home with a deposit of only 5 per cent.
There are many benefits for investors through providing strong security with a proven low risk of default, the potential for place-based investments, rapid deployment of funds (since homes are secured off the open market with a customer ready to move in), diversification and scale, and, importantly, long-term inflation-linked returns. What’s more, UK pension funds are significantly underweight in residential property versus global benchmarks.
Furthermore, this is an investment with strong ESG and impact credentials as it is helping to address a huge societal issue that has ramifications well beyond the housing market. It is positive for certain groups that are often excluded from the opportunity to get on the housing ladder including public sector and key workers, those looking for a Shariah-compliant way to own their home, and the self-employed.
We’ve already raised £75m from a number of pension schemes, and we have already helped hundreds of people start the journey to fully owning their home. Linking support for first-time buyers looking to build an asset, with providing a secure, stable, inflation-linked return to pension funds creates a virtuous circle that can have a positive impact on the aspirations of many.
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