From the initial moment some first-time buyers step foot inside their new home they are already choreographing their next move up the housing ladder and how best to achieve this.
The standard pattern for most homebuyers is to start low, with a one-bedroom flat for example, and slowly escalate over the years to their ‘forever’ home, perhaps with a move once every seven to eight years.
From conversations with mortgage brokers however and our own experience, we are starting to see a new phenomenon in the market - the ‘leapfrog buyer’.
Whilst we have witnessed their emergence in the high net worth (HNW) market, it will undoubtedly also be occurring in other corners of the mortgage sector.
Such buyers are often deterred by the seemingly ever-increasing stamp duty land tax (SDLT) costs which come hand in hand with moving. And in a bid to reduce such costs, they are looking to make larger ‘leaps’ up the property ladder than once envisaged.
This could mean making just one or potentially two big moves, opposed to 3-4 or even five smaller ones over the lifespan of their homeownership, and in the current low interest rate environment, this is achievable for some.
"For so-called ‘leapfrog buyers’, it’s vital that if they are trying to bypass the traditional property ladder steps, they do not fall or stumble on the way up"
The impact of stamp duty
Whilst the SDLT hikes have been felt in most corners of the mortgage market (first-time-buyers aside), for HNW individuals in particular, they have cut deep and can be enough to deter or postpone a house move.
For a client looking to buy a £5m property, assuming they are not a first-time-buyer, their SDLT bill would amount to a hefty £513,750 – an effective tax rate of 10.27%.
This goes up further still to £663,750 - 13.28 %, if they are buying a second home or buy-to-let property.
The impact the tax is having on the property market, especially at the higher end has been widely discussed. The latest figures from the Office for National Statistics show there were 3,900 property transactions over £2m which were liable for SDLT between 2017- 2018. The figure is slightly up on the 3,500 transactions recorded between 2016-2017 but down on the 4,100 between 2015-16.
Figures from UK Finance also paint an interesting picture, showing that in 2018, some 370,000 first-time buyer mortgages were completed, compared to 367,800 new home mover mortgages. While this is great for the first-time buyer market, it does make you wonder what impact the SDLT increases have had on the home mover market.
A word of caution
It makes sense that buyers would be looking to limit their SDLT bill where possible but for so-called ‘leapfrog buyers’, it’s vital that if they are trying to bypass the traditional property ladder steps, they do not fall or stumble on the way up, by extending themselves too far.
Whilst for the right client a bigger leap than once planned might not be out of the question, for others, options such as remortgaging or renovating may be a better choice, especially in the current low fixed rate environment.
If a client is a candidate for ‘leapfrogging’ however, a private bank can help in many ways, by utilising the client’s existing assets through cross-collateralisation for example, or structuring their mortgage on a partial interest-only basis, or over varying rates and terms.
By taking more of a holistic view of a HNW client’s finances, this can potentially enable them to borrow more. Whilst a retail bank may offer a lower interest rate, it may be restrictive in terms of borrowing potential when considering a client’s income. However, with a private bank taking a wider view of your circumstances, it may be the answer to enabling a ‘leapfrog buyer’.
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Head of Business Development Intermediary Mortgages