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How to move up the property ladder

How to move up the property ladder

There are three things you need to do or have in order to step onto the next rung.

Neil Faulkner

Mortgages and Home

Neil Faulkner
Updated on 4 May 2011

Once you're on the property ladder, you might think you can relax, safe in the knowledge that eventually your property price will go up, and then you can sell at a profit and get on the next rung of the ladder, and then repeat until you're in your dream home.

It's not that simple.

While you might not make as many mistakes as the first time, as we explained in The 12 biggest property blunders, financially speaking, getting in the position to move to the next rung can be as difficult as getting onto the first one. What's more, rising prices can sometimes be your enemy, not your friend.

The negative side of rising prices

If your property is worth £100,000 and goes up in value by 10%, it is now worth £110,000. However, if the property you want to buy costs £200,000 and it also goes up 10%, it now costs £220,000. Although the percentage increase is the same, the pound amount is not.

Prices don't rise uniformly across all areas and all housing types. Perhaps some large houses in The 50 best rural areas to live, for example, increase faster than smaller properties in neighbouring towns. But the point is that an increase in prices at the higher end has a larger effect than at the lower end. The effect of this is to put a greater strain on your income when making repayments.

Let's say that when you sold your previous property for its new price of £110,000, you repaid your mortgage for a total of £50,000. I'm ignoring additional costs to keep it simple. This means that you have got £60,000 equity from your £110,000 home to go towards the new one. Hence, you need a mortgage of £160,000 to cover the rest of the £220,000 price tag.

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However, if prices had stayed the same, with your property at £100,000 and the new one at £200,000, when you repaid your £50,000 mortgage and put £50,000 equity towards the new property, your new mortgage would be just £150,000 - £10,000 less.

Hence, the monthly affordability of the new home worsens when prices rise. The reverse is true when they fall.

The positive side of rising prices

There's an interesting flip side. When prices rise, deposits on more expensive properties become more affordable.

Let's say that your home is worth £100,000 and your mortgage is also £100,000, perhaps because prices have fallen since you bought. You have no equity, so your deposit on the new, £200,000 property is zero.

If prices of both properties rise 10%, you now have £10,000 in equity, so a £10,000 deposit. On a £220,000 property, that is 4.5%. Probably not enough, but it's a start, and further increases in prices will help you some more.

Rising prices will always help people with existing mortgages to pay larger deposits on future homes. When prices fall, deposits are harder to raise.

What if you can't keep up or catch up?

You may find that your equity doesn't catch up fast enough with the deposit you need for your next step. Perhaps this is because property prices on the next rung are going up faster in your desired area than your own property. Perhaps it's because of the oppressive additional costs of buying and selling at once, such as Stamp Duty or estate-agent fees, for example.

John Fitzsimons looks at how to work out what offer to make on a property.

Even more likely, you may find that your income is not rising fast enough to pay for the growing mortgage you require on the next rung.

The solution to these problems is saving money, attending to your career, and patience.

If your property price is not going up fast enough in relation to the deposit you require on your desired new property, you need to save more in order to overtake this rate of growth.

Let's say that you need £20,000 extra and expect your future property to go up 20% in five years. This means you'll also need a 20% greater deposit of £24,000. Hence, if you want to buy in five years you'll need to save about £4,800 per year. Take into account you may need more or less, depending on what happens to the price of your existing property and the interest you earn on your savings.

If the deposit is your only problem, not your income, you just have to increase your savings. However, if income is a problem, you have two solutions. You could try to increase your earnings, perhaps through taking on extra work, doing some additional training, or simply applying for higher-paid jobs within your abilities.

If that is difficult, your second solution is to save even more, so that you can pay a larger deposit and take out a smaller loan, which will b more within your means of repaying.

The third ingredient is as important

If that sounds unfeasible, it might be because you're trying to rush.

Property is very expensive, so it does take time. Some people never reach the second rung, just as some never reach the first, but, if it's your goal, your best bet is to work harder and save as much as you can, until the price, your earnings, and your equity all come together.

So it's just like buying your first property.

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