Owning your home gives you greater capacity to take investment risk than someone in the same situation who doesn’t own a home. Understanding this – and acting on it – can be behaviourally challenging. But ignoring it can be extremely costly.
Houses – especially those we intend to live in indefinitely – pose a particular puzzle for financial planning. They’re often both someone’s most financially valuable and most behaviourally complex asset. Many people would be appalled if you excluded the value of their house from their balance sheet. Yet many of these same people would – often quite strenuously – insist that you exclude the asset from any planning: its value is to be looked at but not touched.
However, while it may look like a shrewd and simple approach on the surface, ruling out the possibility of future downsizing, equity release, or outright sale, as we’ll see in a moment, cuts off the chance to grow your non-property wealth as effectively. Excluding your home from your planning could easily exclude a lot of future investment growth to apply that planning to.
In this article, we explore the technical and behavioural roots of this error, and show why emotional discomfort shouldn’t be ignored—and how confronting it early can avoid far greater financial and emotional costs down the line.
Property's Role in Calculating Risk Capacity
To understand why leaving a house off the planning table keeps a foot on the brake pedal of one’s other investments, we need to understand the concept of Risk Capacity.
Your Risk Capacity is your financial ability to take investment risk. It’s useful to think about it in terms of your reliance on your investible assets to fund your lifestyle. The less reliant you are on your investment portfolio to fund future expenditure, the more capacity you have to risk the value of that portfolio. At the extreme end, if you have a non-investment source of income that’s guaranteed to cover your costs for the rest of your days, you can take as much investment risk as you like without worrying about how a crash could affect your lifestyle.
Broadly speaking, any asset that makes you less reliant on your investments to fund your lifestyle increases the potential to take risk with those investments. Property, art, cars, wine… however illiquid they may be, can all potentially be sold, borrowed against, or otherwise leveraged if liquidity is required. An investor without such assets would be that bit more reliant on their investment portfolio, and thus have that bit less capacity to take risk with that portfolio.
This emotional denial of the home’s financial ballast often stems from a fear of one day being forced to sell it. But excluding it entirely from planning artificially constrains the risk that can be taken with investible assets. If the home isn’t acknowledged as an asset that could – if needed – be drawn on, then its value can’t support taking more investment risk now. And this, in turn, restricts the potential growth of those investments – with long-term financial and emotional consequences.
Acknowledging that you can, in an emergency, call on the value of your house in some way (which is very far from actually ever doing so!) fundamentally changes how reliant you are on your investment portfolio (and therefore how much risk is suitable to take with it).
However, balance-sheet valuations are easy. Accounting for your willingness to part with something is a different matter entirely. Selling a cherished property can carry incalculable emotional costs, or be constrained by factors such as not being comfortable selling it until the person who gifted it to you has passed.
Outside of some rare edge cases (which we’ll look at below), owning your home undeniably increases your Risk Capacity. But the extent to which it does so is a much more open question.
The Typical 'Silo' Approach
One typical response to this puzzle is to ignore it: put the portfolio in one silo, the house in another, and plan as if the house didn’t exist. If selling a home is ‘unthinkable’, then it simply shan’t be thought about, whatever the consequences.
A minor variation on this approach is to admit that, yes, if it really came to it, then re-mortgaging, or equity release, or even downsizing could be considered. But then and only then. Which in practical terms amounts to still ignoring it for planning purposes.
This approach has the advantage of being very simple. However, this simplicity comes at the cost of potentially complicating everything else. A cost that could end up compounding over decades.
Consider someone who, by ignoring their property for Risk Capacity purposes, restricts themselves to taking a ‘medium-low’ level of investment risk, when their true capacity would suggest a ‘high’ level – cutting expected returns by 2% per year. Over two decades, that compounds to around 50% lower cumulative returns. In human terms, that’s two very different retirements: not because it wasn’t suitable to take the risk, but because the ability to do so was artificially constrained.
Ironically, ignoring your home for planning purposes can reinforce the very emotional attachments that caused you to exclude it. The more it dominates your balance sheet, the more it may come to represent emotional ‘safety’, increasing reluctance to consider it a usable asset.
In addition to how unused Risk Capacity turns into foregone gains, there are other financial and emotional complications to consider:
- The financial effect of a mortgage – If the house has a mortgage attached to it, even if the house’s value is ignored, the mortgage, as a financial liability and fixed expense, cannot be; you’re not getting away with leaving a debt and a (likely major) expenditure out of your Risk Capacity calculation. This means that the net effect of the home ownership, even with a small mortgage relative to the property value, is to reduce Risk Capacity. This outcome arises only because the house value has been excluded. A low LTV mortgage shouldn’t reduce Risk Capacity – but it does, if the property isn’t counted.
- The emotional effect of resilience – Many retirees experience intense Spending Reluctance—a chronic hesitation to use their wealth, driven by a fear of running out. The result is often decades of anxious frugality and self-imposed penury, even while sitting on substantial assets. When the home is excluded from planning—financially and emotionally—it ceases to be seen as a source of resilience. This mental ring-fencing reduces perceived financial flexibility, narrows perceived options, and deepens the sense of scarcity that underpins Spending Reluctance. These emotional barriers are rarely formed in retirement. They’re often reinforced by earlier decisions not to acknowledge the home’s potential role in supporting long-term resilience. By naming and discussing this value early, advisers can help reduce both the financial costs of underinvestment and the emotional toll of spending reluctance later in life.
An Alternative Apporach: Seeing Property as Investment-Risk Collateral
There’s no need to turn an emotional barrier to better use of assets (especially non-investment assets) into a permanent financial blockade.
When we understand the role of a property in providing Risk Capacity – acting as a sort of collateral for taking more investment risk – the shortcomings of the silo approach can easily be overcome.
There are several best-practice points to be aware of when including the value of a property in a Risk Capacity calculation.
What if Risk Capacity is high only because of including the property?
This is the main potential concern. The answer is neither to ignore the extra capacity, nor to blindly follow what the algorithm says, like someone who’s so submissive to their sat-nav that they drive into the sea.
We want to ensure we reflect the extra capacity the property enables, but we also want to make the investor aware of its singular source, and plan accordingly. The ‘answer’ therefore is to flag such cases, and use them as a trigger for a conversation between the investor and their adviser. The algorithmic assessment is a diagnostic tool, but the prescription must be more personal.
Once the investor understands that the investment risk they take is effectively underwritten by their hard assets, and that therefore in the event they need to withdraw investments when their portfolio value is low, they may need to draw on these assets in some way to provide liquidity, they will be in a much better position to plan for, and ultimately make, these decisions – while benefitting along the way from the increased potential for investment growth enabled by their non-investible assets.
These discussions should not be a one-off. Both the market value of a property and the owner’s willingness to sell it can shift over time – sometimes rapidly. It is better to review both and update the Risk Capacity assessment accordingly at each annual review than it is to place excessive confidence in complex, spuriously precise estimates.
How should you value property for Risk Capacity purposes?
It would be reckless to copy and paste the full value of a property from a balance sheet into a Risk Capacity calculation. Property values are inherently uncertain—and, more importantly, it’s not just the current value that matters, but how much of it could realistically be accessed if needed. Our approach adjusts the value used in the calculation to reflect not only a conservative estimate of market value (not a Zoopla guess!), but also the fact that access to this value—through sale, remortgaging, or downsizing—might come at an unpredictable time, under pressure, and not at the owner’s choosing. The goal is to arrive at a kind of ‘cash equivalent’ value: what the property is really worth as a source of liquidity in adverse conditions.
What if an asset is, despite having a real market value, unsellable in practice?
We have encountered a few rare, but real, occasions where there is a stronger case for significantly reducing (e.g., by 80% or more) a property’s value for Risk Capacity purposes – or even excluding it entirely.
Examples include: a house internally restructured for a specific disability; a property inherited by five siblings requiring unanimous consent to sell; or homes held in trusts with restrictive covenants.
While our tools don’t allow these cases to be flagged explicitly, advisers can review these situations during a planning conversation and, where appropriate, adjust the inputs to reflect a more realistic valuation. This reinforces the value of professional oversight—especially when clients enter financial data themselves.
Home Ownership can be a Behavioural Burden... or a Benefit
Non-investment assets (especially main residences) have a key role to play in making the most of investment assets, especially when it comes to maximising the opportunities for a financially and emotionally comfortable retirement.
There are behavioural barriers to doing this well. As with the emotional barriers some investors face to getting invested at all or staying invested amid short-term turbulence, the right answer is not to run away from the behavioural considerations. Ignoring things for short-term comfort can lead to long-term discomfort. We should instead seek to understand the emotional constraints, together with their associated costs, and then make informed decisions about when the emotional cost is worth bearing – and when it’s not. Understanding things early—emotionally and financially—opens the door to both better investment outcomes and a more comfortable future.
