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Monday, 1 August 2011

A Baby Boomer's Guide to House Price Valuation

This guide is for couples born between 1945 and 1950, who bought a house for thirty thousand or so in the 1970s or 1980s, and who still live in it having escaped divorce and successfully paid off the mortgage.

In some parts of the country, they live in a very nice house worth £300 000 or so; in other parts, in some jerry-built disaster zone worth £300 000 or so.

It feels good, sipping your glass of Waitrose wine, to be sitting on £300k in equity. And life expectancy figures tell you (and your children) that you can still be sitting there in twenty years time.

But house prices go down as well as up. That is the worry The Daily Mail nags you with.

It's not really relevant. Here's the test you should perform.

Imagine that you sell your house and invest the equity into something as safe as houses. Maybe you can earn £15k annually in interest. But you have to pay tax on at least some of this (it won't all squeeze into ISAs) and you have to allow the capital sum to grow a bit (not take out all the interest) if you want to maintain the real value of your income in the face of some inflation. The combined effect is that you can only net around £10k a year.

Now imagine that you rent your house back to yourself. If it would cost you more than £10k to rent, then there's your gain from owning your own house outright. If it would cost you less, there's your loss. In most parts of the country, you will be making a gain of a few thousand.

Forget about the equity, forget about what you paid out in mortgage interest (that's the past), the difference between potential interest income and imputed rent is the current Benefit (or Disaster) of Home Ownership - and probably for the next twenty years.

As for the Equity, that's the Benefit to your children. If you died today, it would be a big benefit to them because chances are they are struggling in the housing market. If you live a normal life span, the inheritance will come too late - best leave it to your grandchildren in that case.

Want to help now? Remortgage at low interest rates up to the point where your imputed rental gain from ownership drops to zero. Hand the money to your children, as a gift if you can afford it or as a low-interest loan if you can't. Some mortgage companies (Alliance Leicester) will lend until you are 75 at normal rates of interest.

Have another glass of wine and think about it.

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