We can't keep stretching ourselves ever further financially to own our homes without acknowledging that sacrifices have to be made elsewhere.
Even a global pandemic has done little to dent the meteoric rise in house prices.
According to the latest data from the Office for National Statistics, house prices jumped by 11.8% in the 12 months to September, up from the 10.2% rise registered in August.
As a result, the average home is now worth a meaty £270,000 ‒ a new record, and a massive £28,000 higher than this point a year ago.
This isn’t exactly a one-off, either.
Back in 2009 for example, the average house price stood at less than £155,000.
Longer mortgage terms
One of the ways that people cope with the pace of house price rises has been to stretch their mortgage terms.
By paying it off over a longer-term, you cut the size of your monthly repayment, potentially making it more manageable.
There is an obvious sting in the tail to doing this though. Paying it off for longer means that it ends up costing you more overall since you’re paying interest on the remaining debt for longer.
What’s more, from a practical perspective, you are literally taking longer to pay off the mortgage.
That means the mortgage bill will be taking a chunk out of your monthly income for a more substantial period, and if it’s going on the house, it can’t be used in other ways, like contributing to a pension.
In fact, for some borrowers, that longer mortgage term actually takes them into retirement.
As a result, not only will they struggle to devote enough money to their pension in the first place, they may then have to use some of the pension income they do receive to pay off the remainder of the mortgage.
We only have so much money
As much as people like me bang on about how useful it is to start saving for your pension early ‒ and it really is a smart move if you can afford to do it ‒ the reality is that when you first start working you only have so much disposable income left each month.
And for most people, the first priority is going to be getting onto the housing ladder.
Of course, those house price jumps mean it takes longer to save a deposit in the first place, even if you are lucky enough to get some help from your loved ones, while the size of the mortgage you need probably means that you won’t have a huge amount left to stick in a pension.
While the workplace pension scheme has been a phenomenal success in getting people to save for their retirements, the reality is that even with the added contributions from employers and the tax relief on top, sticking to the minimum contributions is not going to result in some life of luxury in retirement.
Making the most of what you have
The first is making the most of the biggest asset we have, namely our properties.
There’s no need to scrimp by on a modest pension when you’re sat in an asset worth a packet.
Downsizing relies on more homes being built specifically aimed at older people, but even if you don’t want to leave, there is always equity release.
It’s far from perfect, but it can allow you not only to supplement your pension but also pass on an inheritance to your loved ones while you’re still around to see them benefit from it, rather than holding on until you die.
We may also need to adopt a different strategy towards our pension saving, where we focus entirely on the deposit and mortgage in our early working life, before hiking up our pension contributions as we hit middle age.
Personally, I think that’s a bit of a risk, but it may mean a better retirement for some.
Can house prices keep rising?
I have been writing about housing for over a decade now, and I’ve heard countless times that the massive house price growth is all a bubble that can’t possibly last, with a crash just around the corner that will bring prices down to something more ‘reasonable.
Obviously, it hasn’t happened yet.
House prices are driven up by the chronic lack of supply ‒ a report by the House of Lords a few years ago suggested that we would need to build as many as 300,000 new homes a year to make a dent on house price growth, and the sad truth is that we aren’t producing anywhere near that many.
What’s more, there have been constant initiatives from the Government that boost demand rather than supply, like the Stamp Duty holiday or the introduction of the Help to Buy scheme.
Until we produce enough homes to actually meet that demand, then prices will continue to rise, and people will be forced to choose between devoting their money towards a pension or towards getting onto ‒ and staying on ‒ the housing ladder.