Have you ever sat with your friends down the pub and discussed when you’re next likely to move home?
Perhaps you’re all waiting for your flats to increase in value before upgrading to a small house and then, as your family begins to expand, buy something bigger.
Unfortunately, the financial crisis and the UK’s housing shortages have combined to make this dream of upward mobility more difficult to achieve. Is climbing the property ladder getting harder?
Here we look at how the market has changed, the key reasons why it’s happened and what home buyers can do to get around the problem.
What’s happening in the housing market?
It is second steppers – people moving from their first home – who are facing the biggest challenges, research shows. However, there isn’t the same help as with first time buyers.
According to a 2018 report, nearly 60% of those buying their second home said it would have been impossible to do without financial support from parents, grandparents and even friends.
What the report reveals is the huge gap between the value of people’s first and second homes, which is creating the problems.
This can be a substantial amount of money. According to more recent research, the gap between a flat and a house has almost doubled from £37,225 in 2008 to £75,225 today.
Why is the second stepper-gap growing?
The gap is growing because apartments are not increasing in value enough to catch up with houses.
For example, the average price of a flat for sale has increased by £30,000 over the past four years but detached houses have increased in value by over £60,000, Land Registry figures show. This illustrates how the gap has been widening in recent years.
The gap is even bigger in cities. For example, in London the average price of a semi-detached house is £400,000 more than a flat for sale, in Manchester it’s £58,000 and in Leeds the gap is £61,000, Rightmove figures show.
One explanation for these significant second-stepper price gaps is the UK’s ongoing housing shortage. At the moment we build 180,000 homes a year, but 227,000 new households are created. Demand for housing is outstripping supply significantly, and this is pushing up house prices.
What else makes it difficult to climb up the housing ladder?
Here’s a look at some of the top contenders.
Stamp duty is one of the greatest barriers to moving up the property ladder for many people.
While most first-time buyers outside London and the Home Counties pay little or no stamp duty on a property if it’s bought for less than £300,000 second steppers have no such privileges.
Anyone moving up the property ladder to a home for sale at between £250,000 and £925,000 will pay between £2,500 and £36,250 in stamp duty.
Mortgage lending rules introduced after the financial crash in 2008 also make moving up the ladder more difficult. Before the crisis, lenders focused largely on loan to value calculations, not affordability. This used to benefit second steppers who could use the equity in their first home to reduce the loan-to-value ratio for their next one up the ladder.
Loan to value is the size of a mortgage as a percentage of a property’s purchase price. For example, a £150,000 mortgage used to buy a £200,000 has a loan-to-value ratio of 75%. Use a mortgage affordability calculator to get a better understanding.
But, now the rules require lenders to look more closely whether you can keep up with monthly repayments. They will ask questions about your outgoings and in general ‘stress test’ your finances to see if you’d be able to pay the mortgage if interest rates increased.
Improve your chances of getting a mortgage by doing your research thoroughly.
How can I move up the property ladder?
There are several options available if you do want to move.
Bank of mum and dad
Many people are turning to the ‘bank of mum and dad’ for help including tapping up parents, uncles, aunts and grandparents for financial help.
Some people do this informally, others draw up legal agreements that set out how much interest is paid, if any, and how and when it will be repaid. This means either monthly or as a lump sum after a set period. Other agreements can offer equity in the property in return for family loans.
Several lenders including Lloyds, Barclays and The Nottingham offer specialist mortgages that enable parents to stand as guarantors and either offer to pay the mortgage should their family member default, or use the equity in their own home to underpin the mortgage deal. They do this by reducing the loan-to-value ratio of the mortgage with their own equity.
Many mortgage brokers can advise on which kind of bank of mum and dad mortgage might be most suitable for your circumstances.
We all want to live in areas that are either cool or up and coming but this comes at a cost. Prices of homes in areas which are not desirable can be 20% or even 30% less than ‘hot’ areas nearby. This can help make the figures stack up and keep mortgage repayments low.
For the best deals, try getting on your estate agent’s hot buyer’s list.
Helping you find your next home
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