A third of a million people who bought starter homes four years ago – just before the property crash – are trapped in their home by falling prices and a flat property market.
Those who have started a family and desperately need more space are being forced to make do with cramped conditions, with no hope in sight of being able to afford to move to a bigger home. Research published today by HSBC reveals that unless 2007's first-time buyers have made some substantial savings or overpayments on their mortgage, it could be impossible for them to move up the property ladder.
With the average first-time buyer's home costing £162,423 in 2007 and falling 7 per cent in value since, that's a fall of £11,362. The bank has calculated that the average family will be in exactly the same financial position now, even after making four years of mortgage repayments.
A typical first-time buyer who bought four years ago with a 10 per cent deposit would have started with £16,000 equity. But the fall in property values since then will have left them with just £5,000 of their original deposit. On a normal repayment mortgage they would have paid £11,000 off the loan, so they would now have £16,000 equity in their property – the same as they had at the start.
However, to buy the average UK home, second-time buyers would need to raise £27,000 to cover the cost of selling their first home, have a 10 per cent deposit on the new home and pay for stamp duty, HSBC says. That would leave an average family £11,000 away from being able to afford a move.
Typical is Brett Tudor, who runs internet marketing company www.seoprofessor.co.uk. The 37-year-old bought his first home –an apartment in what used to be a brewery building in the centre of Wrexham – for £135,000 in 2007 with his wife, Zuzana.
The couple now have a two-year-old daughter Talitha and are desperate to move to a bigger home, but can't. "We bought the apartment as a starter home," Brett explains. "At the time we hoped that prices would increase enough for us to sell and move up the ladder. Unfortunately we will now be staying put until we raise enough for a deposit, which by current estimates will be around £20,000."
Having looked into the possibility of moving, he says there's not much of a chance of selling right now. "There are few people interested in buying at the moment, so we will hold off putting it on the market."
One in 12 family households say they are unable to move due to a lack of equity in their home, or because they would struggle to get a bigger mortgage, says research from insurer LV. But as children arrive, the average British family has lost 11 sq ft of living space in the last three years, the insurer adds. It means children are unable to have their own bedrooms and, when they get older, will not have an area for private study.
The squeeze is getting so pronounced that one in eight families have even made potentially unsafe modifications to their homes to create more space. Second-time buyers in the South East face the highest gap, with a shortfall of almost £18,000, according to HSBC. That's because the average property in the region is worth £260,000, which means a buyer will have to pay the higher 3 per cent rate of stamp duty.
Solutions include moving to cheaper areas, where a bigger property may be the same price as a smaller starter home. But such downshifting is not an option for many because of work restrictions.
The most sensible thing to do is make overpayments on a mortgage, says Pete Dockar, head of mortgages at HSBC. "Making overpayments... can help build up finances. Overpaying increases the equity in a first home, and bolsters the deposit available to people for an onward move."
But people must check out any early repayment penalties first, he warned.