Helping Generation Rent to get onto the Housing Ladder
Allow First-Time Buyers borrow the deposit from their pension fund
Home ownership is more important than a pension in guaranteeing a comfortable retirement
During their working life the housing costs of a homeowner are lower than the housing costs of a renter. It is usually much cheaper to pay a mortgage than to pay rent.
These lower housing costs, leave the homeowner with more money to contribute to a pension over the longer term.
So, a homeowner is likely to end up with lower housing costs and a bigger pension fund in retirement.
A renter in retirement is vulnerable to
• Rental inflation
• Longevity risk – depleting the pension fund by living too long
• Investment risk – running out of money because the investment returns are too low
All of these risks are greatly reduced for a homeowner.
• They are not affected by rental inflation
• They will have the house as long as they live
• Residential property tends to be less volatile than the stock markets
Furthermore, if a homeowner runs down their pension fund in retirement, they can get a reverse mortgage, also known as a life loan, secured on their home.
We have to reverse the fall in home ownership in Ireland
The ESRI has estimated that about 50% of people who are currently in the 25 to 34 age cohort will still be renting in retirement. This compares to only 10% of those who are currently retired. This condemns a large group of citizens to uncertainty and the risk of poverty. It will also put an unsustainable burden on the Exchequer to support their rent payments.
In contrast, Singapore has a fully integrated pensions and housing system which has contributed to increasing the level of home ownership from 29.4% in 1970 to over 90% within 20 years.
Boosting home ownership requires a multi-strand approach:
• increasing the supply of housing
• reducing the price of housing
• helping First-Time Buyers access the finance for the deposit
This submission focuses on helping first-time buyers access the finance for the deposit.
This is not proposed as a quick fix to the current problems. It’s proposed to be a part of the long-term architecture of pensions and home ownership.
Allow First-Time Buyers to borrow the deposit from their pension fund
• Allow First-time Buyers borrow up to 20% of the cost of their home from their pension fund.
• It is important to stress that they are not reducing the amount or value of assets in their pension fund. They are borrowing the deposit from their pension fund. So instead of investing in shares, the fund is investing in a loan to the pension fund holder.
• The holder of the pension fund would repay this loan
- from their income over time, or
- when they sell their home, or
- from the 25% tax-free lump sum on retirement.
The advantages are huge:
• a greater proportion of the population would own their own home
• young people would get on the housing ladder much earlier
• their overall housing costs would be much lower as homeowners than as renters
• young people would be much more enthusiastic about contributing to pension funds
• in particular, it would make the proposed auto-enrolment much more attractive
• and, of course, they would not be dependent on the state for rental support in retirement.
The International Actuarial Association has a comprehensive discussion paper on the topic :
Interaction Between Pension and Housing.
This paper explains how Singapore quadrupled the supply of housing and increased the level of home ownership from 29.4% in 1970 to over 90% within 20 years.
Integrating pension policy and housing policy was a key part of this astonishing achievement.