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Property ladder - when did you buy your second home?

So I've moved into my first pad, its so sweet but i'm thinking 3-5yrs down line to get bigger place so right now I'm overpaying my mortgage giving me bigger capital but just wondered when best to start looking at next place to go up the ladder.

Also do I still need to build a deposit given I'm using capital on my existing flat as not quite sure how it works.

My mum thinks I should sell up in a years time as the place already worth £20k more than what I paid for it but I wonder then about all those lovely fees again I'd have to pay, so surely styaing in a place long as possible and moving less but bumping up the ladder i'd pay less in fees and stamp duty overall. E.g. if I stay put here for say 5yrs, overpay as I am and hopefully buy a 3 bed house rather than in 2yrs time buy a 2 bed garden flat.
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Comments

  • I think you have to remember that as well as your property going up in value by a percentage, it is likely that a lot of the places you will be looking at will have gone up as well....unless you are planning on moving to another area.

    I completely agree with your ethic on overpaying. If you can afford it, it saves you time and money in the long run. It may even help to get you a better rate of interest when you renew you mortgage.

    With regard to bumping up the property ladder I think you have the right idea. You have to take into account the fees and consider that dead money. If that money was put into your mortgage (or savings if you are at capacity with your overpayment), you would have a much bigger chunk of equity/deposit for a bigger place a few years down the line.

    There are people who will tell you that they sold high, rented for a bit and bought low again a year or so later. Those people do exist, but very few of them planned that. Circumstances just led to that being the situation and they benefited from it.

    Keep going with what you are doing. It sounds like a very mature way thinking to me.
  • The fewer moves the better really as the fees and removal costs etc will eat into your 'profit'. Best to jump up at larger intervals. Logically houses will go up in value at a similar rate so as yours increases, so will the one you want to buy so you'll be no worse off for waiting really. That's just my opinion :-)
    Obviously most people only move up the ladder when their circumstances change and they have more money available or have had a wage rise so can borrow more etc. I lived in my 2 bed home for 9 years and would still be living there till I was old with a few cats maybe if I hadn't met my husband. We pooled our resources and now live in a 4 bed that I don't intend ever moving from until we need a bungalow or something. I've just never got peoples urge to keep moving, I find it too draining and stressful to never be settled. But that's just me.
  • Bought 1st at 21 in 2003, and sold in 2005 (found commute to work in London too hard as we bought too far away).

    Bought 2nd at 25 in 2006 and still live in it now. Will have to sell soonish as my brother bought my ex out and now brother wants to move on with his fiancee, but otherwise, I'm probably live here forever!

    I'm another one for thinking moving costs too much, both in money and stress!
    Pink Sproglettes born 2008 and 2010
    Mortgages (End 2017) - £180,235.03
    (End 2021) - £131,215.25 DID IT!!!
    (End 2022) - Target £116,213.81
  • We have probably just spent £8000 moving house, kind of focuses the mind that it is something you don't want to do too often unless you are on a winner, eg buying a wreck and making suficient profit that it is worth while.
  • An extra £20,000 often buys a lot of extra house. So don't rush if your current place suits you. Keep paying down that mortgage and saving, so the next move really counts.
    Been away for a while.
  • You have to understand how equity is built up by the so-called property ladder.

    When you buy a house, let's say for 100k with a 10k deposit, you take on a mortgage of 90k.

    If the house appreciates 10%, then you end up with a 110k house, but the mortgage is still a 90k liability.

    When you sell, 20k of equity is therefore left over. Your 'wealth' has not increased by 10%, but by 100%.

    So as long as you have been using debt financing, your equity grows quicker than the next house value that you move to. It's one reason why housing booms tend to have a sort of self-sustaining momentum.

    The thing to understand however, is that it also works the other way. If housing goes down just 10% then you lose 100% of your equity. It increases risk.

    This is why it is so important to consider the safety buffer of equity, and how well your income can support you if it does go wrong. With cheap houses, it's less of an issue as people can usually earn themselves through any difficulties, but with houses that dwarf your income, it is just a big bet on house prices and on interest rates.

    I say the so-called housing ladder because the last 20 years of appreciation have been an anomaly in terms of how far and how fast that have gone. So a whole generation think it is more of a ladder than it really is.

    If you wanted to truly know how frequently you should move for financial purposes alone, then to do a proper analysis you actually need to forecast all the following variables (at the very least):

    - the future path of house prices
    - the future path of interest rates
    - the costs of moving, both direct and indirect.

    Your mother's approach of 'moving because it has gone up 20k' does not really qualify as valid analysis
  • TBH I really like this place and see myself here for 3-5yrs rather than my mums 1yr projection simply becuase its in a lovely location and great flat with mod cons.
  • ACG
    ACG Posts: 24,251 Forumite
    Part of the Furniture 10,000 Posts Name Dropper I've helped Parliament
    I bought my second (current) house at 27 - but there is no point comparing ages as it will depend on circumstances (where you live, whether you are buying alone etc).

    If you sell your current place, the equity in there will form your deposit for the next property. So current property is worth say £200k, equity is say £50k. You then decide to purchase somewhere for £300k and you have £50k (minus fees) to put down as your deposit.

    If your intention is to move to somewhere bigger/nicer etc then personally I think doing it sooner rather than later is better as house prices are rising and they will cost you more than holding back a year just so you can divide your stamp duty by 4 years instead of 3 (for example).

    My intention is to move but I cant a mortgage for what I need so I just have to stay put whilst I hammer the savings and hope my savings go up faster than house prices.
    I am a Mortgage Adviser
    You should note that this site doesn't check my status as a mortgage adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
  • Idiophreak
    Idiophreak Posts: 12,024 Forumite
    10,000 Posts Combo Breaker
    You have to understand how equity is built up by the so-called property ladder.

    When you buy a house, let's say for 100k with a 10k deposit, you take on a mortgage of 90k.

    If the house appreciates 10%, then you end up with a 110k house, but the mortgage is still a 90k liability.

    When you sell, 20k of equity is therefore left over. Your 'wealth' has not increased by 10%, but by 100%.

    So as long as you have been using debt financing, your equity grows quicker than the next house value that you move to.

    Really struggling with this logic.

    If property 1 has risen by 10%, odds on property 2 has risen by 10%, too.

    So, yes, they now own 20/110...but the new house will now be (eg) 220 instead of 200. So where before they'd have had needed to mortgage 190/200...they'd now have to mortgage 200/220...

    Great, in terms of getting a mortgage, they're on a better LTV, but the total amount they need to borrow is still increasing.

    It was this mechanism that caused me to move earlier in the year...I'd got a bit of a deposit (plus some equity from five years of mortgage payments) and had made some good money on my first home (25% increase in value), so I had a decent chunk to put down...but with every year that passed, the total amount of borrowing needed to leap to another property was getting higher and higher. It got to the stage where if I didn't buy this year, I wouldn't be able to afford the mortgage next year, so I had to move.
  • princeofpounds
    princeofpounds Posts: 10,396 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    edited 18 December 2014 pm31 7:07PM
    Really struggling with this logic.

    The logic is very simple; it is in fact mechanistic.

    I think perhaps you are trying to over-interpret the mechanism I am describing as a total explanation of how people trade up to higher value houses. It is clearly not the only consideration. The OP was specifically asking about how the equity portion worked in an environment of changing property prices.

    To get a little bit more complicated, you have to understand the difference between real and nominal assets and liabilities. House prices are real; over the long term they tend to increase with inflation. Mortgages are nominal; they do not.

    Importantly, wages are also real. So if wages increase similarly to house prices (which they roughly do, again over the long term) then the mortgage/income ratio actually falls as inflation eats away at the mortgage value in real terms.

    If you like, do the maths yourself, assuming that in the first time period wages are 50 (for simplicity) and that they also appreciate 10%.

    I left it out because
    - a) it was not pertinent to the original question
    - b) people often struggle with real and nominal concepts
    - c) people are often unwilling to believe that wages can inflate at similar levels to house prices, simply because house prices have done so well over the last 20 years. [These people need to google the 'Herengracht Index', and also do a bit of maths about the limiting case of perpetual geometric relative appreciation.]

    There are also complicated issues around the higher lending salary multiple and lower interest rates possible with better LTVs, which counter-intuitively mean that the mortgage which is technically more of a stretch may in reality be more affordable and available.

    And of course cyclical factors which can dominate over the short term. And you can use the wages of others to sustain the mortgage liability rather than your own (one reason why BTL has become so prominent in the last 20yrs, though not the only reason).

    So it is a complex picture in reality, but the process I have outlined (particularly when including wage inflation in the model) is basically what the so-called housing ladder actually is.
    So, yes, they now own 20/110...but the new house will now be (eg) 220 instead of 200. So where before they'd have had needed to mortgage 190/200...they'd now have to mortgage 200/220...

    The 190/200 mortgage would be 95% LTV and basically impossible to get (unless you live in 2007). The 200/220 mortgage would be possible to get. Some possibility of getting a mortgage is a lot better than no possibility of getting a mortgage!
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