Trading up is hard to do

Buyers wanting to move into that dream family home are struggling with the price gap, says Stephen Pritchard

First-time buyers might seem the most obvious group to lose out as a result of higher house prices. But according to the September house price index from the Nationwide Building Society, trading up the property ladder is the hardest it has been for 10 years.

First-time buyers might seem the most obvious group to lose out as a result of higher house prices. But according to the September house price index from the Nationwide Building Society, trading up the property ladder is the hardest it has been for 10 years.

This is particularly hitting buyers who want to trade up to a "family home", usually the largest property that anyone buys in their lifetime. These properties are in such demand that, even where the overall property market has cooled, their prices have risen by more than the average house price increase.

"In percentage terms, cheaper properties such as terraced houses have outperformed more expensive properties over the last three years," says Alex Bannister, chief economist at the Nationwide.

"But for existing home owners looking to trade up, what matters is the change in the price of their property, against the change in price of the property they want to buy."

In absolute cash terms - rather than in percentages - prices of detached properties in particular have risen faster than any other property type.

The Nationwide calculates that a family trading up from a semi-detached to a detached property in the West Midlands today would need to find an additional £70,000. In mid 1999 the differential would have been £40,000, in today's money.

So although home owners will have built up equity in their existing houses over recent years, they face borrowing even more in order to move further up the property ladder. And properties in catchment areas for good schools have seen the largest price rises of all.

"If you are looking in these areas, you are likely to find that it is a bit of a jump in terms of price, and a bit of a stretch in terms of borrowing," cautions James Cotton, mortgage specialist at brokers London & Country.

The situation is not made any easier, because house price inflation has outstripped both increases in earnings, and returns on assets including cash and shares. For most buyers, this means borrowing more. Fortunately, buyers who last moved home in the mid to late 90s will find that the mortgage market today is more flexible than it was then.

Interest rates, despite rises this year, remain low in historic terms. And a growing number of lenders, including big names such as Halifax and Nationwide, have moved from simple salary multiples to affordability when it comes to working out how much a buyer can borrow.

Affordability works to the advantage of buyers moving up the property ladder. As a buyer's income increases, lenders will allow larger loans. This is because the basic necessities of day-to-day living rise more gradually than salaries, leaving more money over to service a mortgage. Older buyers may also have paid off other loans.

"Interest rates are historically low, so although you might be borrowing more in money terms, it may not actually cost that much in terms of how much you take home each month," Cotton says. "Lenders can offer more, without being irresponsible."

Buyers can also act now to put themselves in a stronger position when it comes to trading up. Some are prepared to sell up and rent, hoping that they will achieve the best possible price for the home they sell, and a lower purchase price for their next home. This is an extreme option, especially for a family.

But it is worth taking a careful look at all the family's financial assets. In some cases, it will pay to sell shares or other investments now to fund a house purchase, even if those investments are performing well.

This is because lenders offer better deals to buyers with large deposits. According to mortgage experts, even increasing a deposit from 20 per cent to 25 per cent of a property's value can result in a better interest rate. A larger deposit might, depending on the lender, also allow a buyer to borrow a larger multiple of their salary, putting a better home within reach.

Anyone planning to buy a house, based in part on selling investments, should take professional advice on when to cash in. If an investment is hit by a sudden fall in value, they might find they are unable to afford the home they planned to buy.