First time buyers struggle to move to the second rung on housing market
First time buyers who bought a property in 2007 face a gap of £62,281 when trying to move to the second rung on the housing ladder according to research from online bank first direct.
The gap in cash for a deposit to secure their next step is £6,464 on average, while the additional amount they need to borrow is £55,817.
The average first time buyer house in 2007 was bought for £167,417 with a £16,742 deposit. However, the average fall in house value of £7,819 means they now only have £8,923 of their original deposit left. Assuming they have been making capital repayments on the mortgage for the past five years, these first time buyers would now have paid off £14,600 of the loan, giving them a total of £23,521 equity.
When looking to move, the average house price now is £229,435, meaning a 10% deposit, as well as moving costs for stamp duty, conveyancers and estate agents amounts to £29,985, leaving a gap of £6,464 between their current equity and the amount of cash they need to move house.
The average second time buyer who first bought in 2007 also requires additional borrowing on their current mortgage of £55,817 in order to move into the average 2012 home. When they bought first time around, they borrowed an average of £150,675, some 3.42 times their household income of £44,000.
However, the jump in asking prices between first time buyer and second time buyer properties is greater than income inflation meaning they now need to borrow £206,492, some 4.2 times their income of £49,192. As a result, an estimated 360,000 first time buyers who bought in 2007 may be trapped in their first homes.
As with the housing market as a whole, the deposit gap findings are greatly boosted by house prices in the capital. London is the only place in the country where average first time buyers from 2007 have enough equity for a deposit to secure their onward move. Fuelled by house price rises of 6.52% over the past five years, home owners making capital repayments now have £68,000 equity in their home, enough to pay a £39,000 deposit and moving costs and have £10,000 left over.
However, when the additional borrowing required is also factored in, second time buyers in London face the biggest jump as they need to borrow an additional £107,000 on top of their existing mortgage, giving them a total moving gap of £96,529.
Those in Northern Ireland face the opposite. They face a shortfall in equity of £75,000 as the value of their home has dropped by 50%, putting them in negative equity by £56,679 but the mortgage they require is £31,000 less than their original loan due to falling house prices. Their total moving gap is therefore £31,294.
In mainland UK, those in Wales face the smallest total moving gap of £32,757 with a cash moving gap of £9,591 and a mortgage approval gap of £23,166.
‘In a climate of falling house prices in many parts of the country, first time buyers can no longer rely on funding their next move with profits from the sale of their home. Those that haven’t taken steps to counter this may find that they can’t afford a deposit and the additional costs associated with moving, when looking to reach to the next rung of the ladder,’ said Ian Bartholomew, senior mortgage product manager at first direct.
‘For younger home owners hopeful of moving to a bigger property in years to come, overpaying on their mortgage is the key to building up enough equity to enable their next move,’ he added.
Bartholomew pointed out that first direct offers several 90% loan to value mortgages for those with a smaller deposit including a fee free 4.99% five year fixed repayment mortgage. All first direct mortgages have the additional benefit of unlimited overpayments giving movers the flexibility to reduce the impact a decline in the housing market may have on the deposit for their next home.