Help me understand how the property ladder works??

[Keke94LND]

Hey all, so I am an idiot and don't understand how the property ladder works at all.. please help me with the following scenario..

Thinking about purchasing a 2 bed garden flat in London that needs work, price is £425k, 15% deposit which is £63,750, so we would be borrowing £361,250. We would put in an initial £30k to do the flat up (replastering walls, re flooring, new kitchen, new bathroom, do up garden) over time we are also thinking we could add a home office at the end of the garden, we would make the house look nicer from the outside to increase its curb appeal etc etc etc.

Other similar 2 bed garden flats, that are already done up, on the same street have sold this year for between £500k and £550k, so we are thinking, if we put in £30k to do it up, we could instantly increase the value by double that?

We would likely stay in the flat for 5 years, the flat is in an area of London that has been growing over the last 10 years and is still growing (for reference its an area close to Balham that could become similar to Balham in years to come). We are thinking that by doing the flat up and with added inflation over 5 years, there is potential that the flat could be worth up to £600k by the time we come to sell (maybe we are being naive and overly optimistic in thinking this??)

This is where my main confusion comes from.. I don't want to live in a 2 bed flat forever, and would want to move into a house outside of London in say 5-7 years, but I am concerned about being 'stuck' and not being able to afford to move when that time comes, as i know stamp duty and fees etc are all very expensive.

So how exactly does it work? Am I right when I say the following:

We save over the 5 to 7 years to afford the fees and stamp duty
We still have out £60k deposit
We could have £175k equity (if we were lucky)
So we would then have £235,000 to put towards the next house, would this be our deposit? so we could possibly buy somewhere for maybe £550k? and our next mortgage would then be £315,000

Am I on the right path or am I way off?

Thank you!

Family help is a big factor. Whether with first deposit or with selling a family home for a later move.

@SD25

Family help is a big factor. Whether with first deposit or with selling a family home for a later move.

This Practically everyone I know who has climbed the property ladder has had family help namely, massive cash deposits or through inheritance. My previous neighbour was given £100k deposit from her seventy five year old mother to move from a two bed flat to a four bed semi detached

@countrytown following from PP's point that stamp duty cut is a false economy as higher prices mean stamp duty saving is outweighed by larger mortgage etc, and that stamp duty can be paid from using equity. So you save 50k on stamp duty but have to get a larger mortgage. So it doesn't make a difference except that the government collects less tax.

And for FTB, it really makes no difference as they have always enjoyed stamp duty exemption for first 300k.

@Iamthewombat I understand interest rates and stress testing. Yes, there needs to be room for rates to rise (I can remember them reaching 15% in my childhood and my own first mortgage was on a fix of around 5%) but it seems people are being refused mortgages now even where they are paying considerably more in rent (leaving a fair bit of wiggle room for interest rate movements).

But psychologically it does make a difference to people hence why it boosted the market. That's not to say the higher prices are not a false economy but people tend to think in the hear & now. And plenty of people prefer to borrow more than pay a tax.

@Dotoallasyouwouldbedoneby the house prices in London are high, but the house prices in the SE are also high plus the price of season ticket added to it. 100k extra in mortgage at my interest rate of 2.05% is £217 per month, at least while interest rates stay low. A commuter season ticket from any commuter town costs at least £350, compared to zone 3 to zone 1 at £160. So this is compounded by 2 people commuting. The larger mortgage can be paid back or the flat sold to fund a future move. The money from season tickets is a sunk cost. And of course living in London menas you don't need a car so for me I save on the £2000 per annum that the average Brit spends on a car and plug it back in mortgage overpayments.

I think moving further out is a lifestyle choice more than it being economical tbh.

This seems to make no sense
Unless salaries rise to median 200k

www.mylondon.news/news/property/london-property-london-borough-average-21353888

I think moving further out is a lifestyle choice more than it being economical tbh.

I disagree & think in the current market an expensive flat in London is not the best i financially & as I said upthread I would just skip that stage now. Although you live in a flat as you say so you are going to have a natural bias to thinking that's a better option.

@Embracelife or they are expecting most native Brits to move out and the only ones who stay are the super rich/people who inherited the £2 million houses of both sides of grandparents. And the remaining population to be replaced with the global rich and their children.. I can see that happening in zone 1-3, but not really in the outer zones.

I know a lot of people expected London house prices to be boosted by fleeing HKers but they seem to have bought homes all over, not just in London so the impact is muted

plus at the bottom of the article it says

"These figures are estimates based on their calculations, and assuming that house prices grow at a constant rate, consistent with the rate since 1995."

The stamp duty holiday made the market move very quickly, with would-be buyers offering after the first viewing and many properties going to sealed bids. I live in a popular area (not London, it was on Rightmove's top 10 list and is generally a crazy market) and it was even more crazy than normal, there was less supply and more demand.

There are pros and cons to staying in London, if you want to move out later on, it might be better to move out now, but you will pay a fortune in commuting costs and spend more time on your commute.

@Embracelife- that article is nonsense. It's based on a totally flawed assumption.

At the bottom it says 'Coulters Property used government UK House Price Index data showing the average house price in each local authority from 1995 to predict the monthly growth rate and to project forward 26 years.

These figures are estimates based on their calculations, and assuming that house prices grow at a constant rate, consistent with the rate since 1995.'

@onlychildhamster- the SDLT holiday did make a difference. It meant an up to £15,000 saving but, in many areas, a much higher mortgage of maybe £40-50,000. It has been particularly awful for FTB as you say most already don't pay stamp duty or a reduced amount plus the prices went up massively.

@Lampzade where on earth do people get that kind of money?! I truly don't get it. I consider myself middle class, my dad was a very senior manager earning a top 5% kind of salary in a low cost of living area, mum also earning a wage in an admin job, and the best they can do is give me about 5K or so, which I'm super grateful for, but obviously it's a drop in the ocean compared to what I actually need for even a deposit on a one bed flat!

I keep hearing about people being given 50K, 70K...where are their parents getting that kind of money to just freely give away? Am I actually much poorer than I ever realised?

@Guineapigbridge

Yes, that's how it works. You can also leverage the accumulated equity in your home for other investments.

It's how the rich get richer...

How?

@CanIPleaseHaveOne - Remortgage and borrow some of the equity, use as deposit for a BTL property.

I keep hearing about people being given 50K, 70K...where are their parents getting that kind of money to just freely give away? Am I actually much poorer than I ever realised?

Ime it was quite different for previous generations. So many have seen their own house value go up considerably so if they downsize have cash to spare. Interest only mortgages were more common so more disposable income. Someone buying in the mid 00s may have had a lifetime tracker mortgage which meant they will pay hardly any interest (these don't exist today). Many have inherited other properties & benefited from BTL (the tax changes & legislation make this far less favourable now). Many had very good pensions schemes but continued working. Plus with higher interest rates your savings actually make money.

@Rozziie my impression is that a lot of deposits come from selling grandparents' or distant relatives' houses when they pass away. We live in London so quite a few of these properties will be 600k and above - split that amongst say four grandkids gives you quite a healthy deposit. Most of our parents' degeneration have very healthy pensions with houses worth over 1m (i.e. family homes in very naice areas) so often just pass on any money coming down through the family.

We are in our 40s and my impression is that this is how most people are mid-30s and below get on the property ladder here. Very very few people are able to save the necessary deposit nowadays. My peers often got on the property ladder in the mid-2000s with just 5-10k as a deposit which was enough at the time.

yes I think the deposit for FTBs in London is around 120k. Most people won't be doing that just from savings.

I bought my first flat as a single person around 2000.
I had saved a £10k deposit and my parents lent (and later gifted) me £10k, and I borrowed £60k. I got a favourable interest rate because of decent LTV. My parents could have given me more, but the amount was enough to get me to the level required.

Lots of people have a lot of savings too. Parents of children in their late 20s in the top 5% of earners, often have a decent sized house with plenty of equity, and quite likely have healthy savings too. Over £100k isnt unusual for those approaching retirement who have had a decade with no mortgage and children who are no longer financially reliant.

Other people save specifically to give their kids money for a house. Some save from birth (perhaps the child benefit money which could generate over £20k by age 18) or they put aside uni money and then the children take the loans and instead of receiving the uni money for uni, are given it mud 20s for a house, as people believe saving for a deposit is harder than paying off student debt, given many won’t ever pay it all back.

It is a polarising system. Some kids are given £50k or £100k towards a house (or even bought one outright, but this is much more rare) whilst others receive nothing. Others have parent who can gift a small amount (up to £10k) which is of course a good help and might be sufficient in some areas of the country to make the leap to ownership, but in many areas really won’t make a huge difference now.

Those with the big parental help/grand parental help are also more likely to be able to buy properties without getting into the Help to Buy schemes. They then avoid all the costs and difficulties involved in remortgaging or selling and moving to standard ownership a few years later. The inequalities are growing and the housing market is a key contributor to paradise them.

The inequalities are growing and the housing market is a key contributor to paradise them.

Yes I think for the younger generations whether their own parents own their own home & have the means to help them is more important than a good job.

Yes, I dont think that people without substantial help will be able to buy in London anymore. The gap must be growing, soon enough if your parents/grandparents dont live in London then you wont be able to buy here. I mean maybe not but realistically you would need a 150k deposit soon plus a salary to match which means that FTB in London are older.

However, I wonder whether with WFH even more people will leave London to get their fmily home. This may result in London house prices for 3 and 4 bedroom houses might stall.

Where I am prices have stagnated for years although the prices were high to begin with. I do think affordability is stretched already in some areas.

An acquaintance in his 60s has just lost his mum and inherited her £300k bungalow. He is retired with no mortgage, so some of this is going to his late 20s kids for deposits.

I've probably been a victim of having poor grandparents who had loads of kids, then. My granny lived on a council estate, owned the house but it was only worth about 70K, and she had 7 kids. By the time it was all divided and fees paid, my dad barely inherited anything. I often forget that other people have family wealth or parents and grandparents who benefitted from London house prices.

Being from a rural area also hurts because you don't have the option of staying at home for uni or work. I had to move out at 18 and have paid over £100,000 in rent in my life already. It's so hard to save up while paying London rent, especially on your own!

I keep hearing about people being given 50K, 70K...where are their parents getting that kind of money to just freely give away? Am I actually much poorer than I ever realised?

Parental attitude and financial planning makes a difference. DF and FIL had similar size estates but I've inherited/been given much more than DH and DM is much better off than MIL because of the respective financial planning of our parents.

As far as the property ladder goes DH and I bought a house in the NE 20 years ago and made no money on it when we sold it after 15 years due to the flat market. However, we had much more equity and savings and earnt more than we had 15 years previously so could buy a house worth over double the price we got for our house.