Key Post We should not start pension funds until we have our mortgage paid off

[Brendan Burgess]

I wrote the following article 18 months ago:

Integrating pensions and home ownership

I think it's well worth revisiting this idea as there have been a few developments in the past 18 months.

The first development is that we have since become aware of how much higher mortgage rates are in Ireland than in the rest of the Eurozone. At the AIB Special General Meeting on Wednesday last, I made the point that AIB is charging mortgage holders about 3.5% on average for mortgages on their family home. In July, they issued a mortgage bond at 0.625%. I presume that most of the investors in this bond were pension funds.

So we have the ridiculous situation of Irish people borrowing money at 3.5% to lend back to themselves at 0.625%. It's a fundamental principle of investing that one should not borrow to invest. Because of the complexities of pension funds and mortgages, we lose site of the fact that, that is exactly what most of us are doing. If a person has a mortgage while they have investments, they are effectively borrowing to invest, even if that borrowing was initially used to buy their family home.

I am now going even further than my original suggestion 18 months ago. People should be allowed use up to [€200k] from their "pension fund" to buy their home or pay off the mortgage if they already have a home. Cut out the middlemen and their profits and charges.

Here is an example of what it would look like:




So, they have the same net assets, but their costs would be a lot less because they would be contributing less to the profits and costs of the mortgage industry and the pensions industry.

In practice, it could work something like this. Instead of contributing to a pension fund, the employee and their employer would contribute to a Home Purchase Fund which would attract the same tax reliefs as pension funds. When they are ready to buy a home, they use this money as the deposit. They take out a mortgage in the ordinary way for the balance. They can continue contributing up to [€200k] to reduce the mortgage as quickly as possible. When they have contributed their max, they can then start a pension fund proper. But their accommodation costs will be much reduced, so they will have more funds to contribute to the pension fund.

If they sell the house at any time, they would have to put the amount taken out of the House Purchase Fund back into the House Purchase Fund with interest. That money could only be used to buy another house or to transfer it to the person's pension fund if they did not want to buy a house.

 

[Brendan Burgess]

The second development in the last 18 months is the introduction of the Central Bank guidelines on maximum LTVs putting house purchase and trade-up out of reach for many people. I had anticipated this to some extent in the original article.

Allowing access to pension funds for the deposit, could bring many more buyers into the market and cause an artificial spike in house prices. This could be countered by simultaneously setting a ceiling on mortgages of 80% of the value of the property.

There would be transitional problems introducing a Home Purchase Fund. If a wall of cash hit the housing market while there is no supply, it would just drive up prices which would be counter productive. So the changes would have to be phased in and co-ordinated with other changes.

First stage
Set the maximum in the Home Purchase Fund to €50,000 at first and gradually increase it when its impact on the market have been assessed.
Maybe restrict it to the purchase of newly built houses at first.
Reduce the maximum LTV to 80% for first time purchasers.

Allow people who already have a mortgage to use up to €50,000 from their pension fund to reduce their mortgage.


The overall benefits of the proposal would be huge
People could get on the housing ladder earlier
Younger people would start long-term savings earlier as they could enjoy the benefits much earlier than they would by saving through a pension scheme.
Borrowers would pay much lower interest rates because their LTVs would be much lower


The losers would be the pensions industry who would have much lower funds to manage and the mortgage lenders who would have less demand for mortgages and would see their mortgages paid off much quicker.

Brendan

 

[odyssey06]

I think there's a lot of sense in this proposal.

There seems to be a push in some government advisors away from owning property (Conor Skehan, head of Housing Agency chairman of the Housing Agency http://www.independent.ie/business/...governments-top-housing-adviser-30768334.html).

Any discussion of the merits of house ownership that fails to consider what impact a reduction of it would have on retirement planning is fundamentally flawed. You don't have to own your house when you retire, but you need to be fully aware that if you don't own your own home when you retire you are either going to need a much higher retirement pot OR much more reliance on state support (which the state have shown absolutely no appetite for).

 

[Brendan Burgess]

Giving large amounts of money to people to help them solve a problem of their own making, could and, might just tempt them to find avenues for the "largess" that they shouldn't even contemplate.

I am not sure that I understand this?

The fundamental idea is that we should integrate pensions and home ownership. So people would start saving up for the deposit for their home through their pension fund. There is no problem of their own making in this.

A side effect of the proposal is that people could properly use the scheme to reduce their borrowings which might get them out of negative equity or arrears. I am all for solving this problem whether it is of their own making or as a result of economic circumstances.

Brendan

 

[Purple]

The people who have the power to make this happen are all on defined benefit pensions and have no pension fund to use; this won't help them.

What about our hard pressed state employees? What about the "Front Line" staff who suffer inhuman working conditions for near slave wages? What about Joe Garda and Mary Nurse?

Populist politics; I see that as the biggest stumbling block.