Revealed! How homeowners are cashing in on rising house prices

Soaring house prices mean many homeowners have hit the housing equity jackpot. So what are they doing with their newfound wealth?

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House prices are surging and the average homeowner has seen their property rise in value by almost £30,000 over the past year. This statistic comes at a time when many first-time buyers are finding themselves unable to get on the property ladder.

So how are homeowners spending their newfound wealth? New research reveals all.

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House prices: what’s happened over the past 12 months?

House prices are at record highs, with the latest data from the Office for National Statistics revealing that the average home now costs £270,000. That’s a £28,000 increase in the space of a year.

This means first-time buyers now have to find £54,000 for a typical 20% deposit on the average home. This is a huge challenge for many wannabe homeowners given that the average UK salary (before tax) is just £31,285.

How are homeowners benefiting from rising house prices?

Record house prices paint a bleak picture for first-time buyers. Despite this, new research reveals how homeowners are happily cashing in on their accelerating housing wealth.

According to UK Finance, many homeowners used the Stamp Duty holiday to purchase a second home. Its data reveals that the average sum withdrawn from housing equity for ‘other purposes’ peaked at £106,000 when the Stamp Duty holiday was in effect.

The data doesn’t specify what these ‘other purposes’ were. But the size and timing of such withdrawals suggest booming housing equity was used for second homes. This theory is shared by Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.

She explains, “Property is the new piggy bank. Since August 2020, we’ve been withdrawing more and more equity when we remortgage, as rising property prices have given people the confidence to raid the equity in their home, and the Stamp Duty holiday persuaded them that this was the time to snap up a second property.”

Coles goes on to explain how many homeowners sought second homes as a result of government-imposed lockdowns last year. She explains “The attractions of a holiday home were magnified by lockdowns, when people realised the limitations of full-time city life.

“Meanwhile, runaway house prices presented them with the opportunity to take more equity from their home, and the Stamp Duty holiday provided a window during which they could pay far less tax.

“The period before the Stamp Duty holiday was tapered in June was a golden opportunity to buy a holiday home or a buy-to-let property, because while buyers still had to pay the Stamp Duty surcharge, they didn’t pay any other Stamp Duty on the first £500,000 of the property, cutting their tax bill by thousands of pounds.”

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What else did the data reveal?

Aside from funding second homes, UK Finance’s data also reveals homeowners used their housing equity to fund home improvements. According to its research, the average amount withdrawn for home improvements stood at a whopping £50,000.

Many will be frustrated at the unfairness of growing house prices. This may be particularly the case among young people, who are facing a colossal challenge to buy their own home.

However, it’s worth pointing out that some homeowners released equity last year to help their offspring buy property. Known as the ‘Bank of Mum and Dad’, Hargreaves Lansdown’s Sarah Coles explains this concept in more detail.

“Some of these homeowners will have been raiding their own homes to fund cash for a deposit for their children to get onto the property ladder. It’s one reason why despite deposits being less affordable than ever for first-time buyers (a 20% deposit is 110% of income on average), demand from first-timers meant that prices of homes sold to first-time buyers have been rising faster than the rest of the market.”

Coles also commented on the typical £50,000 withdrawn for home improvements. She says this has helped to push up the cost of labour and materials.

“Lockdown persuaded us to make changes to our homes, and in some cases freed up the cash to get started. This meant a boom in demand for labour and materials, which has pushed prices up, and meant raiding the property piggy bank even more comprehensively to cover the cost.”

Are you on the lookout for a mortgage? Whether you’re looking to finance a second home, or otherwise, see our list of top-rated mortgage deals.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

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