Should you trade up in a falling market?

Should I Move House? 

Trading up in a falling market can work well, but in this market you'll need a decent amount of equity to be able to afford to move.  If you have 25% plus equity in your home, you may well be able - as some buyers have since the credit crunch - to trade up to a property that you thought would be out of your reach some years ago.

For example if you own a property worth £150,000 at the height of 2007 and property prices are currently down by 20%, it'll be worth £120,000. Say you are buying a property previously worth £300,000, it will hopefully have also dropped by 20%, so will now be on the market for £240,000. This would be a massive saving. Not only does it cost £60,000 less, but it's also fallen from the 3% stamp duty bracket into the 1% bracket, so instead of paying £9,000 tax to buy it, you'll only be paying £2,400 - which is a massive saving!

The difficulty you will have though is prior to the credit crunch you would have only typically needed a 10% deposit, which would be £24,000. Now you are likely to need a 25% deposit, so you may have to fork out around £60,000 deposit to get a decent mortgage rate!

The other difficulty you have is if you purchase the new property for £240,000 and property prices keep falling throughout 2012, say by a further 5%, your £240,000 property may only be worth £228,000. If this fall means your equity levels dip below 25%, unless the banks are suddenly much more generous with their mortgage offers, this may mean it's tough to re-mortgage. It will also mean if you suddenly get sick, lose your job or as a couple split up, it may make it impossible to move or sell the property quickly.

So the three golden rules to trading up in a falling market are:-

1. Make sure you intend to stay in the property for more than five years
2. Have back up plans for sickness, job loss or splitting up
3. Check at worst you can rent the property and cover your costs if you have to

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