Using pension funds to help First Time Buyers

Brendan Burgess

Founder
Messages
42,199
The UK Pensions Minister , Guy Opperman, has raised this possibility, so I sent him a distilled version of my various submissions on the topic over the years.

I see now that some UK lenders are welcoming the idea.


Using pension funds to help First Time Buyers


23rd October 2020

Summary proposal

  • A pension fund should be allowed to lend up to 25% of the cost of a house to a first time buyer
  • Interest would be charged at [2%]
  • A home buyer who does not have enough in his pension fund could initially borrow the 10% deposit but continue to contribute to the pension fund and later borrow enough to bring the Loan to Value on the bank loan down to 80%.
Options for repaying the loan

  • The borrower could be required to repay the loan over 15 years as is the case in Canada for such loans.
  • The borrower could be required to pay the interest on the loan but not the capital.
  • The interest could be rolled up and the loan would not be repaid until the house is sold or until the person retires.
If the interest is rolled up, the borrower can focus on repaying their bank mortgage and reducing the LTV even further.

Advantages

  • There is no early withdrawal from the pension fund so the pension fund does not reduce.
  • In fact, total pension fund savings would increase as young workers would enthusiastically max their pension contributions.
  • The pension fund has an income earning asset.
  • House buyers can qualify for <80% LTV mortgages which have much lower interest rates
  • The banks will have much higher quality loan bookd which could be important in the event of another banking crisis
  • Members of Final Salary pension schemes could participate in it
  • Government supports for FTBs could be gradually withdrawn
  • It is easily scalable. The 25% figure can be introduced gradually to avoid a wall of money hitting a limited housing supply.




What happens if the house is sold at a loss?


Purchase price of house£100k
Funded by bank mortgage£75k
Funded by pension loan£25k
House sold for£90k
Repay bank mortgage£75k
Repaid to pension fund£15k
Balance owing to pension fund£10k


  • Interest would continue to be charged on the £10k
  • The borrower would be required to repay it over 5 years
  • Any balance due after 5 years would be repaid through cashing enough of the pension fund subject to a 30% tax. For example, if the balance due was £7k, £10k would be “withdrawn” from the fund and £3k paid in taxation.
  • Or it could be just left there as an asset of the pension fund and deducted from any payment due on retirement.
Although this is an unsatisfactory outcome, it’s less unsatisfactory than the current situation where the bank is left with an uncollectable shortfall and the borrower with a damaged credit record.

Possible extensions of the scheme

  • It could be extended to Second Time Buyers
    • There is no reason to limit it to First Time Buyers other than it is easier to gain public acceptance for “helping” First Time Buyers
  • The pension fund could be used to avoid mortgage arrears
    • If the borrower loses their job, rather than face repossession, they could pay their mortgage from their pension fund
From a young person’s point of view

Pensions would no longer be something of little concern to them. They would realise that if they start maxing their contributions to their pension fund, they can use the fund to help them get on the housing ladder sooner. In effect, they can benefit from their contributions within a few years rather than having to wait until they retire.

At the moment a borrower with a 95% LTV mortgage is very vulnerable. They might well be advised to minimise their pension contributions and get the mortgage down to a more comfortable level. Under my proposal, they will have a 75% mortgage with their Bank and 25% with their pension fund. A 75% mortgage is a comfortable level of borrowing, so they can continue contributing to their pension fund.

This is a better system than allowing First Time Buyers to withdraw the deposit from their pension fund

If a withdrawal from a pension fund is allowed…

  • The pension fund would be reduced and people might stop contributing
  • It would be portrayed as giving tax incentives for home ownership
  • It is just too complicated and requires many legal changes
  • Very hard to apply it to Final Salary schemes
A loan from a pension fund is very easy to set up and very easy to repay.

Other countries do allow house buyers to access their pension schemes to buy their home

In the United States, a first time buyer can borrow a sum equal to half their 401(k) fund or $50,000 whichever is less. They are required to pay back that loan according to a term set by the administrator of the 401(k). More information

In Canada, a First Time Buyer is allowed to borrow up to $35,000 without penalty from their Retirement Savings Plan, but it must be paid back over 15 years. More information
 

Jim2007

Frequent Poster
Messages
2,181
In a country where there is already a major pension under funding, exposing pension funds to say a 25% risk, when the general consensus is about 6% - 7% is a really dumb idea. And that is before even addressing any subprime aspects. But it will keep the voters and the developers happy and with a bit of luck if it does blow it will be some one else’s problem. It’s not as if you’re home could be in negative equity and your pension screwed at the same time or could it?
 

Brendan Burgess

Founder
Messages
42,199
Hi Jim

It will reduce the underfunding problem.

A lot of people do not contribute to pension because getting access to the money is so far away. If you tell a 23 year old who has just started working that the more they contribute to a pension fund, the sooner they can get on the housing ladder, they will start contributing to their pension fund a lot earlier.

Brendan
 

Brendan Burgess

Founder
Messages
42,199
exposing pension funds to say a 25% risk, when the general consensus is about 6% - 7% is a really dumb idea.
If you look at a pension fund completely in isolation from the person's other assets, you might have a point.

But a typical 35 year old who has just bought a house in Ireland has a balance sheet something like this:

5047

So they are borrowing to invest in equities - which I presume you would not agree with?

My proposal would result in a much less riskier balance sheet.

5048
and
5049
 

Thirsty

Frequent Poster
Messages
2,736
Similar scheme was implemented in Singapore; in conjunction with massive investment in building what were known as Utility apartments.

They now have something like 90% home ownership. It took decades however, and a high degree of central planning.
 
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