Property ladder - how do you get on it and how does it work?

[asblackasyoursoul]

I'm 21 and totally naive to mortgages and buying houses. I'm still at home with my parents but we're in council housing so I can't ask them as they won't know (as far as I'm aware no one in my family has ever owned a house).

So getting onto the property ladder. Is it best to get a mortgage on somewhere cheapish, say £150k? But then what happens if a few years later I want to move to a different house that costs more (let's assume I've got the money to do so). I know this is probably a totally ridiculous question but I've been googling and my head is a bit scrambled with it all.

If I've only paid a few years of the mortgage on the £150k house then how on earth does it work with selling it when it isn't actually my house?

Is it best to just save, save, save for a few years to get the 'ideal' house? I'm totally lost, please be gentle!

Buying and selling has a cost and closing out your mortgage and getting a new one does have costs associated with it.

I wouldn't advise buying a house if you think you'll sell it in 2 years, you'll have a hard time breaking even.

But definitely if you think you can stay there at least 5 years then it's probably worth it.

The really clever people don't bother selling, they just let out the property and buy a new one, tapping into their existing equity. This is a little more complex and if you have this mindset from beginning you should be looking at different things when you're looking for a property.

But yeah i think it's great you're thinking of this already at 21 when your parents have never owned before.

To move up the ladder, you use the equity in your current house (the amount you’ve paid off the mortgage) as the deposit for your new house.

So, if you bought a house for £150k with a 10% deposit (£15k), you would owe £135k on the mortgage. If you pay off £5k a year for 3 years, you would then owe £120k. If you then sell the house for £150k, you pay £120k to the bank to pay off the mortgage, and get £30k in your bank account.

Of course, you’re probably selling your house to buy a new one, so that £30k is only in your account very briefly before going back to the bank to be used as the deposit for the mortgage for the new house. As you’ve got a bigger deposit, you can get a mortgage for a bigger amount and buy a bigger house.

You’re charged interest, so you might pay £7k a year in mortgage repayments but only reduce the amount by £5k as the other £2k pays off the interest.

Most people start with a smaller house and move to a larger house after a few years through a combination of paying off the mortgage, getting a better paying job etc.

Works no differently to any other loan, except that you are using the loan to buy an asset. The asset can then be sold to pay back the loan, and if it has gone up in value, you then have more money or less of the loan to pay off when you sell it, depending what you want to do. So just like any loan, you have to be sure you understand how you can afford repayments, including if the interest rate goes up in future. Most people go for fixed rate mortgages. This means the interest rate stays the same regardless of the market. They are usually deals for 2 or 5 years. So if you want to buy a house for 150k, the bank will expect you to put in a deposit of 10% at least. Your mortgage is then 90% of the value. This is called LTV, loan to value. So you need 15k up front. You then get the mortgage, if 135k is about 4-6 times your salary, or joint salary if you buy with a partner. The "ladder" part refers to house price changes. If they go up, you can be lucky and sell one house, then use the valuee change to buy a bigger house. So let's say your house is worth 200k in a few years. You sell it. Pay back the 135 or whatever is left of i(as most mortgages from load the interest, you will probably be paying back a similar amount to what you borrows for the first few years) . Leaves you with a deposit of, say, 65k. So you can either buy a similar house with a way bigger deposit or a bigger house with a similar LTV. That is risky, becaaue you still have to be able to afford the payments on a bigger principle amount. Also ladders can go down, I. E. Your property is worth less than you paid. Anyway. Just save the deposit first. Then look. And remember to budget for surveys and solicitors and stamp duty if applicable.

Thank you this is really helpful!

You also need a deposit when you buy your first house. Pre covid you could typically get a 95% mortgage so only needed 5% deposit but i think in recent times the deposit you need is more like 10-15%.

Bear in mind that the bank will lend 4.5ish x your income so I had to put down 20% deposit due to the max the bank could lend me and the cost of the house I wanted to buy.

There are a few important costs you need to keep in mind. When you buy a house you need to (usually) pay a solicitor, a surveyor, the bank for the mortgage after the first purchase a tax called stamp duty. You will need that in cash as well as your deposit, which is non 10% of the value of the house.

Once you get a mortgage and buy each month you will pay an amount of your loan back as well as interest on the loan. When you come to sell you your solicitor will repay your mortgage loan back to the bank, keep their fee and pay the estate agent and return to you what is leftover.

If you are lucky the leftover will be higher than what you put in initially and you use that as a deposit for the next house.

It is important that you are certain you can afford the house and that you are sensible with repayments.

A surveyor... on googling that's someone who would check the house and make sure there's no issues with it?

Are they essential? How much do they cost?

Stamp duty.. solicitor... lots to learn!

@asblackasyoursoul

A surveyor... on googling that's someone who would check the house and make sure there's no issues with it?

Are they essential? How much do they cost?

Stamp duty.. solicitor... lots to learn!

Yeah the transaction cost of buying a property for combined buyer/seller can cost around 10-15% of the purchase price so keep that in mind. Every time you switch houses you're effectively losing this much money which is why it's not wise to switch houses every couple years.

@asblackasyoursoul

A surveyor... on googling that's someone who would check the house and make sure there's no issues with it?

Are they essential? How much do they cost?

Stamp duty.. solicitor... lots to learn!

A bank won't lend you money without at least a basic survey. Buying a house is a costly endeavour. But if you are wise and plan it can work out for the best.

The most important thing to learn is financial discipline and building up savings. Whether you buy or not savings will be the single most important thing you can do for your future.

Op the most important things ar
How much do you earn..... you can usually borrow up to 4 times your annual salary.....work this out first.
How much money do you need to buy?
Deposit.. at least 5% of asking price of property 10% gives you more mortgage choice.
Solicitors fees...anything from a few hundred to about £1400 in London.
Stamp duty.....nothing up to 500K purchase price currently.
Valuation fees...dependent on lender, roughly £300- £500

See what house prices are where you live. Think about flat v small house, aim to stay put for 5 years.
Think about a fixed rate mortgage for security.

If buying alone and funds allow, having a second bedroom for a lodger is a good way to increase your security and ease the bills.

Try London and country mortgages, they are independent brokers who would look at all the market for the best mortage deals for your circumstances.

Educate yourself online and understand all you can...Good luck, l bought my first flat at 21 and it was the single best decision l ever made.

A typical "property ladder story" might go like this.

Save up deposit of £15k. Have a look at what the bank will lend. This is probably 4 x salary, so on £25k pa it'll be around £100k. This gives you a figure to work with of £115k, assuming you have additional saved for solicitor (£1000ish), removal vans and stamp duty. There is no stamp duty on transactions below £125,000 or for first time buyers. Mortgage arrangement fees and survey costs are added to the mortgage if you need to (reducing your amount to spend accordingly, in this case to about £113k). You can pay these with additional savings or even on a credit card.

Buy a house for £113k. Live in it for 5 years. Pay £700 pcm (or whatever it says to plus any extra you can afford to reduce mortgage asap) of which an average of £400pcm comes off the actual balance. In reality this figure isn't realistic, interest is always proportionally higher in the first few years, but the mortgage company can give you a breakdown. This reduces the amount you owe by £24,000 - £400 x 60months - over the 5 years. You need to pay buildings insurance in case the house burns down and life insurance to pay off the debt if you die. This costs about £350 per year probably.

5 years time
You now owe £89k on the home you live in. You also now earn £30k pa. Your house is now worth £130k. You can remortgage by selling what you live in simultaneously to buying a new house. This discharges the debt of £89k with the new mortgage. You now have a £41k "deposit" and will be able to borrow 4 x £30k, giving you a total budget of £161k. You have built up savings too but they pay solicitors fees (£1000 x 2, fees for buying and for selling this time), estate agent fees of 1% on your sale, stamp duty and removals. There will be mortgage arrangement and survey fees too. Any savings left over can be added into the pot to increase your budget or you can keep the same budget and have a lower mortgage.

And so on.

There was a good article in the Times or FT how the property ladder doesn't really exist anymore for people under a certain age. Largely because it now takes quite a lot of time to build equity, people are buying later, the first rung is so high & it's expensive to move.

If I was young now (i'm in my 30s) I would skip a stage eg the flat in or near a city.

It can seem a bit daunting at first op, but don’t worry. You usually pick it up as you go along and people like solicitors are working for you, and they’ll generally tell you what you need to do, eg what paperwork you need to fill in etc.

Surveys are essential- you won’t get a mortgage without one. There are different levels of survey - a ‘homebuyers survey’ which basically looks at the house and gives a relatively superficial overview... eg the house actually exists, has windows and a roof etc. A full structural survey would be a wiser option if you were buying an older property.

I’d recommend mortgage broker - they can do a lot of the legwork in terms of applying for a mortgage and also have access to the rest mortgage deals.

Well done for asking the questions and finding this out. In my opinion the sooner you get on the property ladder, the better.

Another thing to mention is that when you have a mortgage, at first a massive part of what you pay is interest. We paid £1500 a month and £1000 of that was interest, but gradually that reduces and you pay more off the equity. I only mention it because your first years mortgage statement can be a bit depressing.

Hi OP.

Martin Lewis is an amazing source of information and advice for you. He eplains things so well too.
Check out this page, it includes information on government schemes to help and incentivise first time buyers. I know a lot of people at work in their twenties who are using these.

www.moneysavingexpert.com/mortgages/house-buying-guide/

Good Luck!

Save, save, save. The more you can put down the better. Try and get £20k saved and remember every little helps.

Open a separate bank account for this purpose and move across even spare pennies. Start a spreadsheet. Make saving your hobby.

Good luck it will pay off!

There are virtually no loans right now with 5% deposit. So 10% is vital. This will also mean your interest rate is more than someone with, say, 35%. Always assume no more than 4x your income. Always buy 2 beds and rent out a room to a friend. You want a life as well as house!

Consider where it is. Often young people do not want large gardens but want to be near city life. Families tend to want further out. If you spend £150,000 stamp duty tax is negligible. A survey is vital. You really need to know if there are issues which will cost a lot to repair. A good solicitor will inform you about anything that is legally detrimental about the property. Eg short lease length. Everyone will take you through each step.

The trading up process is as others describe. Many trade up when they buy jointly with a partner. Or get left money or just get a better job.

Being your age is amazing to buy a house I purchased at £130k in 2010 I was 20 years old I put down 15k ( at 18 me and my partner saved £300 a month for around 2 years we had 7.5k each deposit) so borrowed 115k I have sold for £270k in 2020 In those 10 years my mortgage is got down too 85k so I now have a deposit it of 185k once I pay the bank my left over mortgage of 85k (hope this makes sense) now being 30 with more income and deposit I have just brought a 500k house everything you do in your 20s will have a impact on how your 30s and 40s turn out, good luck too you! Anything is possible!

I forgot to mention I’m also from a low income family who have never owned a house!

There is no ladder, it s a Ponzi scheme which, like any of them, requires new entrant to support the pyramide. In that case, this is first time buyer who have to leverage themselves further and further to pay the unrealised equity of the ones higher up the chains. That s why the government always have a myriad of subsidy for first time buyers such as no stamp duty, Home ISA, etc.

Looking at London, price have reached such a grotesque level that there isn’t anyone not owning already a house (or their parents via transferring some equity to their up bringing) that can enter the game, leading to fairly still market price for the last 5 years and low volumes with people swapping home at different stage of their life. It s likely that if you had bought a flat in 2017, you would have very little equity from price increase, hence you would be no closer to own a family house.

When I first bought a flat I was 26 and totally naive. A mortgage broker sat and talked me through mortgages very slowly and the part that stayed with me was that for every £1 you borrow, you pay back £2 or £3. So the larger your deposit the less you have to borrow and the less that costs. The longer you can stay at home and save OP, the better position you'll be in with a deposit. Obviously you have to balance that with prices rising faster than you can save.

Looking at London, price have reached such a grotesque level that there isn’t anyone not owning already a house (or their parents via transferring some equity to their up bringing) that can enter the game, leading to fairly still market price for the last 5 years and low volumes with people swapping home at different stage of their life. It s likely that if you had bought a flat in 2017, you would have very little equity from price increase, hence you would be no closer to own a family house.

I agree, prices have stagnated in many toppy areas. My area is the same for the the last 5 yrs once you allow for stamp duty (maybe less). People are still getting on the ladder as quite a bit of help but many are stuck. 40 yr mortgages will probably be the next thing.
I'm lucky that I got on relatively early but our next move will be ££££. I really resent having to spend so much on a mortgage. It's not a good thing for the economy to have so much money tied up in houses.

House ownership means people do them up. They improve them. They are not paying rent but actually own something at the end. For this reason it’s not a Ponzi scheme. It gives security if you can afford the payments and it gives a platform on which to build a home.

When I first had a mortgage there was tax relief for having it. That was an amazing deal. Better than anything available now. We didn’t get such big multiples of income but our first mortgage was 15% so we needed the tax relief.

Buying in cheap areas is a no brainer if you have a guaranteed job and income for life. So public funded roles will always be good for mortgages. Two people buying together gets you more house too, for obvious reasons. Few people can buy in expensive areas without help from mum and dad. Single people find it difficult now. Couples less so but if two of you earn £25,000 each and want to buy for £165,000 with £15,000 deposit, that’s easy enough. Getting the deposit is the difficult bit!!