Can someone explain 'trading up' to me? :)

tigger123

As the thread title says, I'm hoping someone can explain the advantage of buying a starter home and trading up to me.

Let's say the house I can afford this year is 400k, let's call it House A, but the house I really want is House B, which is 500k. I get a 30 mortgage and purchase House A this year, based upon myself and my partner's combined salary. All grand so far.

I then pay off the mortgage for 10 years and, instead of paying rent, I have now wisely invested these 10 years of mortgage payments.

After 10 years investment I then go to the market with House A and happily discover that it has increased by 20% in value and is now worth 480k. However, House B has also increased by 20% in value and will now cost me 600k. At this point, because 10 years has passed, I can now only get a 20 year mortgage.

If my (and my partners) salaries and financial position hasn't dramatically changed, is House B not still out of reach for us? Our House A increased in value, but so has the cost of House B (at a corresponding rate).

I guess what I'm missing is how the investment (equity?) in House A can be used to our advantage to get House B (our forever home) in 10 years.

Cheers in advance. As me and my partner are looking, we've found this forum and the people who post here to be a huge help

4ensic15

tigger123 wrote: »

As the thread title says, I'm hoping someone can explain the advantage of buying a starter home and trading up to me.

Let's say the house I can afford this year is 400k, let's call it House A, but the house I really want is House B, which is 500k. I get a 30 mortgage and purchase House A this year, based upon myself and my partner's combined salary. All grand so far.

I then pay off the mortgage for 10 years and, instead of paying rent, I have now wisely invested these 10 years of mortgage payments.

After 10 years investment I then go to the market with House A and happily discover that it has increased by 20% in value and is now worth 480k. However, House B has also increased by 20% in value and will now cost me 600k. At this point, because 10 years has passed, I can now only get a 20 year mortgage.

If my (and my partners) salaries and financial position hasn't dramatically changed, is House B not still out of reach for us? Our House A increased in value, but so has the cost of House B (at a corresponding rate).

I guess what I'm missing is how the investment (equity?) in House A can be used to our advantage to get House B (our forever home) in 10 years.

Cheers in advance. As me and my partner are looking, we've found this forum and the people who post here to be a huge help

If your earnings don't rise it is unlikely you can trade up. House prices run in cycles but the general theory is that once you buy and pay down a mortgage you acquire equity and stop paying rent. After a period you now have savings from not paying rent, more equity than your initial deposit and higher earnings. Depending on where you start in the economic cycle, it might work out more or less smoothly. Some people get stuck in the starter home forever and others move up the ladder quickly and easily.

GingerLily

You also have more equity in your home - your original mortgage was probably 360 - so without any payment in the principle you'll have 120k as a deposit for the next house. You'll probably have paid down 70/80k in those ten years so your deposit will actually be nearer 200k.

You do need a higher salary, so trading up only works if you're in a better financial position! With inflation its very unlikely you're salary won't go up, especially considering that you've assumed house growth in this scenario.

riclad

One example of trading up is, you buy what you can get now,
say a 2 bed house or 1 bed apartment.
In 10 years time ,you might be able to sell house a and get a larger 3bed house.
Of course a 3bed house in finglas is the roughly same price as a 1 bed apartment in dublin 1.
My friend bought house in dublin ,
after 10 years ,the capital he owed started to decrease .eg he borrowed
100k, after year 11 he owed 85k approx.
Of course who knows what house prices will be in 10 years time.
What will interest rates be, at some point that will rise.
If you are in dublin you are paying at least 400 euro a month rent.
You have to think it, takes 10-15 years to get equity,
eg you own part of the house, the amount you owe the bank decreases
every year after year 10.
Maybe your wages will rise after 10 years .


https://www.lisney.com/research/blog/1194-moving-on-up-the-how-to-guide-for-trading-up
Your home may be worth more in 10 years time ,which increases
your equity or gives you more acess to capital if
you decide to sell .

Cuddlesworth

GingerLily wrote: »

You also have more equity in your home - your original mortgage was probably 360 - so without any payment in the principle you'll have 120k as a deposit for the next house. You'll probably have paid down 70/80k in those ten years so your deposit will actually be nearer 200k.

You do need a higher salary, so trading up only works if you're in a better financial position! With inflation its very unlikely you're salary won't go up, especially considering that you've assumed house growth in this scenario.

All of this assumes the property value goes up, not down. You could end up owing money at the end of the 10 years, no deposit and no chance of moving while stuck in a property unsuitable for your curcumstances.

Starter homes are what my parents think the house market is, because it was different when they bought and they don't have to face the current reality.

JimmyMW

Cuddlesworth wrote: »

All of this assumes the property value goes up, not down. You could end up owing money at the end of the 10 years, no deposit and no chance of moving while stuck in a property unsuitable for your curcumstances.

Starter homes are what my parents think the house market is, because it was different when they bought and they don't have to face the current reality.

Never a truer word said, in general the people who suffered the most in the last financial crash (property wise) were those who bought "starter homes" which were in no way suitable for their future and relied on trading up after a certain period of time. Couples buying 1 bed apartments to avoid renting and have ended up with massive negative equity, stuck with the apartment and maybe 2 kids.

GingerLily

Cuddlesworth wrote: »

All of this assumes the property value goes up, not down. You could end up owing money at the end of the 10 years, no deposit and no chance of moving while stuck in a property unsuitable for your curcumstances.

Starter homes are what my parents think the house market is, because it was different when they bought and they don't have to face the current reality.

Sorry it does - I was using the OP's specific example of trading up when there's price growth.

I bought my first home this year and although I'll want to trade up I think eventually, I'm aware that I may be stuck!!

BrokenArrows

tigger123 wrote: »

At this point, because 10 years has passed, I can now only get a 20 year mortgage.

There is nothing preventing you from getting another 30 year mortgage.

Sell your current house. You now have a significant amount of CASH due to the increase in house price + 10 years of repayments.

You then use this CASH as a deposit on your better house and because you have a larger deposit you get a better interest rate and spread it over 30 years you could potentially have the better house for the same monthly repayments.

Thats what trading up is.

riclad

Even if property prices fall, at least you are not paying rent,
And you do,t have to worry about getting notice to quit in a few years from a landlord .I don,t think prices will fall in ten years time in dublin.
When you are buying a house ,its a long term investment ,
you need to think in terms of 10-20 years .
If you are single ,you can maybe rent one room out under the rent a room
scheme ,if you buy a 2 or 3 bed house.

Gerry T

A lot of people trade up because of changes in their financial position. Say a good pay rise or marriage bring a second salary or the death of parents leaving an inheritance. Without these it's unlikely house b will happen as kids might arrive and their a serious sink hole. Don't forget buying the second home brings a second stamp duty cost, which I think is really wrong. Any additional stamp should be paid on the house price difference only and not the full value of house b.
Maybe consider house b if you get the mtg, and rent out rooms to help clear debt in the first 5 or 10 yrs.

BarryD2

Another way of looking at it is 'churning the market'. The more times you buy & sell, the more fees to professionals and the more taxes etc to the government. You hear the same sort of argument re changing the car each year. It doesn't cost anything - blaa, blaa, bla. But invariably if you just bought one decent new or near new car and ran it for 8-10 years until there was no or little worth in it, the total cost of ownership over the same period would be considerably less. Likewise if you can buy one house that will be a home in the right area for many years, that's going to cost you less than changing up and save all the hassle of moving!

Cordell

BrokenArrows wrote: »

There is nothing preventing you from getting another 30 year mortgage.

There is, it's called aging. The mortgage cannot extend past your 65th birthday, or so were the rules when I got mine - 29 years mortgage for me.

Riskymove

Cordell wrote: »

There is, it's called aging. The mortgage cannot extend past your 65th birthday, or so were the rules when I got mine - 29 years mortgage for me.

given that pension age is rising and mandatory retirement ages are being raised also this may change

GingerLily

Cordell wrote: »

There is, it's called aging. The mortgage cannot extend past your 65th birthday, or so were the rules when I got mine - 29 years mortgage for me.

Depends on the bank, some allow later

_brendand_

tigger123 wrote: »

As the thread title says, I'm hoping someone can explain the advantage of buying a starter home and trading up to me.

Let's say the house I can afford this year is 400k, let's call it House A, but the house I really want is House B, which is 500k. I get a 30 mortgage and purchase House A this year, based upon myself and my partner's combined salary. All grand so far.

I then pay off the mortgage for 10 years and, instead of paying rent, I have now wisely invested these 10 years of mortgage payments.

After 10 years investment I then go to the market with House A and happily discover that it has increased by 20% in value and is now worth 480k. However, House B has also increased by 20% in value and will now cost me 600k. At this point, because 10 years has passed, I can now only get a 20 year mortgage.

If my (and my partners) salaries and financial position hasn't dramatically changed, is House B not still out of reach for us? Our House A increased in value, but so has the cost of House B (at a corresponding rate).

I guess what I'm missing is how the investment (equity?) in House A can be used to our advantage to get House B (our forever home) in 10 years.

Cheers in advance. As me and my partner are looking, we've found this forum and the people who post here to be a huge help

What you're missing is that a.) you'll be making capital repayments, b.) if you're wise you'll be using the big differential between rent and mortgage payments to save even more/pay of some more of the capital (which saves you even more interest), c.) it's highly unlikely your salary won't go up - it might be well below house price inflation but it will go up.

ELM327

Cordell wrote: »

There is, it's called aging. The mortgage cannot extend past your 65th birthday, or so were the rules when I got mine - 29 years mortgage for me.

BOI allow 70 now, their reasoning being that the likely retirement age when the mortgage ends is likely to be a lot higher than 65.

_brendand_

ELM327 wrote: »

BOI allow 70 now, their reasoning being that the likely retirement age when the mortgage ends is likely to be a lot higher than 65.

Indeed, I currently *have* a mortgage (not drawn down) from UB that will go until I'm 69. Not that I really want to still be working at 69, but.

tigger123

_brendand_ wrote: »

What you're missing is that a.) you'll be making capital repayments, b.) if you're wise you'll be using the big differential between rent and mortgage payments to save even more/pay of some more of the capital (which saves you even more interest), c.) it's highly unlikely your salary won't go up - it might be well below house price inflation but it will go up.

Cheers for all the responses.

What benefit is there in what you mentioned at a), that I'll be "making capital repayments" - is this the equity I'll have built up? How is that beneficial when going for my second house, the forever home?

In my original scenario, I bought House A with a mortgage of 360k, then sold it for 500k. That gives me a profit of 140k to put towards House B which is now costing 600k. So, my new mortgage is then 460k (600k less 140k) over 20 years... ?

How do the ten years of capital payments I have made effect this?

_brendand_

tigger123 wrote: »

Cheers for all the responses.

What benefit is there in what you mentioned at a), that I'll be "making capital repayments" - is this the equity I'll have built up? How is that beneficial when going for my second house, the forever home?

In my original scenario, I bought House A with a mortgage of 360k, then sold it for 500k. That gives me a profit of 140k to put towards House B which is now costing 600k. So, my new mortgage is then 460k (600k less 140k) over 20 years... ?

How do the ten years of capital payments I have made effect this?

Your mortgage won't be 360,000, you will have paid off some of the capital. If you're looking at buying house B in about 5 years from now then you'll have paid for example 5 * 12 * 500 = 30,000 in capital repayments. Therefore your profit will be 500,000 - 330,000 which is 170,000.

Claw Hammer

tigger123 wrote: »

Cheers for all the responses.

What benefit is there in what you mentioned at a), that I'll be "making capital repayments" - is this the equity I'll have built up? How is that beneficial when going for my second house, the forever home?

In my original scenario, I bought House A with a mortgage of 360k, then sold it for 500k. That gives me a profit of 140k to put towards House B which is now costing 600k. So, my new mortgage is then 460k (600k less 140k) over 20 years... ?

How do the ten years of capital payments I have made effect this?

Some of your payment will go towards the ongoing interest bill on your loan and the rest will reduce the amount borrowed. Instead of coming out with 140 K towards House B, you might come out with 200 K. How much you can out with will depend on the term of your mortgage and whether you are not you make any overpayments or indeed if you underpay for a period.

tigger123

_brendand_ wrote: »

Your mortgage won't be 360,000, you will have paid off some of the capital. If you're looking at buying house B in about 5 years from now then you'll have paid for example 5 * 12 * 500 = 30,000 in capital repayments. Therefore your profit will be 500,000 - 330,000 which is 170,000.

Cheers!

If that scenario is being considered by us then I really need to get a break down of how the prinipial and interest proportion of my monthly repayments breaks down over time, i.e., how much capital we'd have paid off in ten years.

GingerLily

_brendand_ wrote: »

Your mortgage won't be 360,000, you will have paid off some of the capital. If you're looking at buying house B in about 5 years from now then you'll have paid for example 5 * 12 * 500 = 30,000 in capital repayments. Therefore your profit will be 500,000 - 330,000 which is 170,000.

Unless you get an interest only mortgage (you won't), you'll be paying off the actual money you owe to the bank so you can give them a smaller proportion when you sell.

tigger123

tigger123 wrote: »

Cheers!

If that scenario is being considered by us then I really need to get a break down of how the prinipial and interest proportion of my monthly repayments breaks down over time, i.e., how much capital we'd have paid off in ten years.

it's easily done on a spreadsheet

_brendand_

_brendand_ wrote: »

Your mortgage won't be 360,000, you will have paid off some of the capital. If you're looking at buying house B in about 5 years from now then you'll have paid for example 5 * 12 * 500 = 30,000 in capital repayments. Therefore your profit will be 500,000 - 330,000 which is 170,000.

Further to this, your bank is required to provide you with an ESIS outlining the cost of payments over the term of the mortgage. Mine illustrates that for our mortgage of 274,000 EUR, on year ten we will have a balance of 221,485.49 (that exact). Assuming our 350,000 EUR house is now worth 450,000 EUR (here's hoping), our equity will be north of 220,000.

tigger123

God, I love boards.

It never stops informing or entertaining.

Borzoi

tigger123 wrote: »

Cheers!

If that scenario is being considered by us then I really need to get a break down of how the prinipial and interest proportion of my monthly repayments breaks down over time, i.e., how much capital we'd have paid off in ten years.

It's scary for the first few years how little capital is being repaid. approx 95% of what you pay initially is just the interest, so it takes a few years to rent the capital

tigger123

I knew the proportion of capital and interest changes hugely over time, the bit I was missing was how after the ten years the mortgage your paying off isn't the same as the original mortgage; a portion of the capital amount is gone.

_brendand_

Borzoi wrote: »

It's scary for the first few years how little capital is being repaid. approx 95% of what you pay initially is just the interest, so it takes a few years to rent the capital

Not true at all. It might vary depending on the size of the loan and the term, but for a typical one of around 300,000 it's about a third of the payment is capital, even at the beginning. The amount of interest to be paid shrinks and capital repaid grows but I can't imagine it would ever be 95/5.

GingerLily

_brendand_ wrote: »

Not true at all. It might vary depending on the size of the loan and the term, but for a typical one of around 300,000 it's about a third of the payment is capital, even at the beginning. The amount of interest to be paid shrinks and capital repaid grows but I can't imagine it would ever be 95/5.

The amount paid in capital is very dependent on the interest rate and term.

For higher interest rates the proportion of capital is less for the first few years.

For a mortgage over 30 years the %capital payments with interest charged of 1.5% is about 64%, where as its nearer to 27% for an interest rate of 4.5%.
The interest rate is very important.

Cuddlesworth

GingerLily wrote: »

The amount paid in capital is very dependent on the interest rate and term.

For higher interest rates the proportion of capital is less for the first few years.

For a mortgage over 30 years the %capital payments with interest charged of 1.5% is about 64%, where as its nearer to 27% for an interest rate of 4.5%.
The interest rate is very important.

https://www.drcalculator.com/mortgage/

If you want to take a look at what your paying and when.

jon1981

The aul "getting on the ladder" and the myth that trading up is free . Trading up was never possible without carrying more debt in the process or higher repayments over a shorter period unless a couple of factors are in your favour:

1) You have more cash and have had regular pay increases far far above inflation
2) You moved to a less desirable location for a larger house ( does that still meet the definition of trading up?!)
3) You've timed the market well, sold at the top and waited out the bottom...not many can do this.
4) Your property appreciated more so than the target location/house.
5) Inheritance...lottery...etc.

GingerLily

Cuddlesworth wrote: »

https://www.drcalculator.com/mortgage/

If you want to take a look at what your paying and when.

Excel works just fine!

Amirani

jon1981 wrote: »

The aul "getting on the ladder" and the myth that trading up is free . Trading up was never possible without carrying more debt in the process or higher repayments over a shorter period unless a couple of factors are in your favour:

1) You have more cash and have had regular pay increases far far above inflation
2) You moved to a less desirable location for a larger house ( does that still meet the definition of trading up?!)
3) You've timed the market well, sold at the top and waited out the bottom...not many can do this.
4) Your property appreciated more so than the target location/house.
5) Inheritance...lottery...etc.

You're missing a pretty crucial one; didn't overextend/max out affordability on first mortgage. If you purchase somewhere that's easily affordable, you can then save enough over the interim period to be able to "trade up".

Also on point 1 - if you're young and well educated, you can normally expect to achieve pay increases comfortably ahead of inflation. This will be the case for a large cohort of potential buyers.

ELM327

Cuddlesworth wrote: »

https://www.drcalculator.com/mortgage/

If you want to take a look at what your paying and when.

Pretty accurate. For my own case given purchase price, term, interest and LTV figures it was approx 15% off on my monthly repayment.
The interest apportioning of repayments on a pro rated basis seems to tie in with my own interpretation of the bank's formula per T+C

jon1981

Amirani wrote: »

Also on point 1 - if you're young and well educated, you can normally expect to achieve pay increases comfortably ahead of inflation. This will be the case for a large cohort of potential buyers.

Good point, there's also a lot of well paid foreign nationals moving here from the US and other carrying alot of RSUs (Stock)

riclad

The main point of trading up, is to buy a dwelling, avoid paying rent, protect
yourself from rising price.s .In 5 years time you might not be able to get
a loan to buy a house in a city or the area thats close to your job.
IF you are single you might get married in the future and buy a joint property ,
2 people can borrow more than a single person.
OF course who knows what prices will be in 10 years time, or
what will happen with interest rates .
So theres no such thing as a simple formula for trading up .

colm_mcm

riclad wrote: »

Even if property prices fall, at least you are not paying rent

That’s assuming you’re not in over your neck and in massive negative equity.

4ensic15

colm_mcm wrote: »

That’s assuming you’re not in over your neck and in massive negative equity.

Still not paying rent!

zl1whqvjs75cdy

colm_mcm wrote: »

That’s assuming you’re not in over your neck and in massive negative equity.

Long as you buy something that suits your long term needs you'll be fine. I bought a 4 bed semi although I have no kids yet. I would like to trade up to a nicer house at some stage but if I get stuck in the current one it won't be the end of the world