First-time buyers face a balancing act when choosing a property—affordability vs. long-term practicality. The average UK home as at writing is £280k. This blog explores why starting with a £150k home may be the smartest financial choice, but also why upgrading after 5 years might be the most practical solution for future growth. We also look at the numbers for 3 different deposit amounts. £7k, £20k and £35k, these values are fairly arbitrary but they will allow you to compare scenarios against your current/target deposit.
Financial Reality: £150k vs. £280k Homes
For first-time buyers, the immediate affordability of a £150k property is hard to beat. It offers lower monthly payments, smaller deposits, and lower overall interest payments compared to a £280k home. However, while the £150k property may work for a few years, growing families might eventually find themselves in need of more space. Here’s a financial comparison of staying in the £150k home, upgrading after 5 years, and starting with a £280k home.
The Numbers: A Financial Comparison
Let’s revisit the costs and returns after a 26-year period (2024 to 2050) with different deposits and property prices.
Scenario 1: Buying a £150k Property and Staying There
First lets do the numbers for different deposit levels for buying and staying in a £150k property for 26 years.
| Deposit Amount | LTV | Interest Rate | Monthly Payment | Total Paid Over 26 Years | Property Value After 26 Years (3% Growth) | Net Profit | ROI |
|---|---|---|---|---|---|---|---|
| £7k Deposit | 95% | 5.5% | £860 | £268,560 | £315,000 | £46,440 | 17% |
| £20k Deposit | 87% | 4.75% | £711 | £222,372 | £315,000 | £92,628 | 42% |
| £35k Deposit | 77% | 4.25% | £615 | £192,780 | £315,000 | £122,220 | 63% |
While staying in a £150k property may be financially appealing, the practical challenges become clear when considering future family needs. Assuming the couple has children or simply desires more living space, staying in a £150k home might not be viable for 25 years. The financial benefits include:
- Lower mortgage payments
- Smaller overall interest payments
- A higher ROI compared to buying a £280k property from the start
However, these benefits come at the cost of limited space and flexibility.
Scenario 2: Buying a £280k Property and Staying There
| Deposit Amount | LTV | Interest Rate | Monthly Payment | Total Paid Over 26 Years | Property Value After 26 Years (3% Growth) | Net Profit | ROI |
|---|---|---|---|---|---|---|---|
| £7k Deposit | 97% | 5.75% | £1,745 | £544,740 | £588,000 | £43,260 | 8% |
| £20k Deposit | 93% | 5.25% | £1,476 | £460,752 | £588,000 | £127,248 | 28% |
| £35k Deposit | 88% | 4.75% | £1,373 | £428,232 | £588,000 | £159,768 | 37% |
The upfront costs of buying a £280k home can be daunting, but the larger home may meet a growing family’s needs for the long term. Although this strategy comes with higher monthly payments and more interest paid over the life of the mortgage, it avoids the need for an upgrade and the associated costs.
Scenario 3: Buying a £150k Property and Upgrading After 5 Years
Phase 1: Initial 5 Years in the £150k Property (with £20k deposit)
| Deposit | Equity After 5 Years | Monthly Payment | Total Paid Over 5 Years | Interest Paid Over 5 Years |
|---|---|---|---|---|
| £20k deposit | £58,500 | £711 | £42,660 | £22,660 |
Phase 2: Upgrading to a £280k Property (with £58.5k deposit from the sale of the first home)
| New Mortgage | LTV | Interest Rate | Monthly Payment | Total Paid Over 21 Years | Property Value After 21 Years (3% Growth) | Total Interest Paid |
|---|---|---|---|---|---|---|
| £221.5k | 85% | 4.75% | £1,277 | £321,948 | £499,800 | £100,448 |
Total for the Upgrade Scenario:
| Total Paid Over 26 Years | Total Equity in the £280k Home | Net Profit | ROI |
|---|---|---|---|
| £364,608 | £499,800 | £135,192 | 37% |
This hybrid approach blends the best of both worlds. By starting with a £150k property, first-time buyers can:
- Benefit from lower payments in the early years
- Build equity in an affordable home
Then, after 5 years, they can use that equity to upgrade to a £280k property, taking advantage of the lower monthly costs in the initial phase while meeting future space needs. The upgrade strategy is a smart compromise between affordability and practicality, especially as family dynamics change.
Comparing Mortgage Payments as a Percentage of Income
According to the Office for National Statistics (ONS), the median household income for a couple in the UK is approximately £63,000 per year, or about £5,250 per month.
Assuming that the couple pays Income Tax and National Insurance contributions, we can estimate their monthly take-home pay. For simplicity, we’ll split the salary equally between two individuals, each earning £31,500 per year.
Using 2023-2024 UK tax bands:
- Personal Allowance: £12,570 (tax-free)
- Basic Rate: 20% on earnings between £12,571 and £50,270
- National Insurance (NI): 12% on earnings between £12,570 and £50,270.
After applying these tax bands, we’ll calculate the monthly take-home pay is £3,916 for the household.
Monthly Mortgage Payments as a % of Take-Home Pay
Scenario 1: Buying a £150k Property and Staying There
| Deposit Amount | LTV | Interest Rate | Monthly Mortgage Payment | Take-Home Pay (Monthly) | % of Take-Home Pay |
|---|---|---|---|---|---|
| £7k Deposit | 95% | 5.5% | £860 | £3,916 | 21.96% |
| £20k Deposit | 87% | 4.75% | £711 | £3,916 | 18.16% |
| £35k Deposit | 77% | 4.25% | £615 | £3,916 | 15.70% |
Scenario 2: Buying a £280k Property and Staying There
| Deposit Amount | LTV | Interest Rate | Monthly Mortgage Payment | Take-Home Pay (Monthly) | % of Take-Home Pay |
|---|---|---|---|---|---|
| £7k Deposit | 97% | 5.75% | £1,745 | £3,916 | 44.55% |
| £20k Deposit | 93% | 5.25% | £1,476 | £3,916 | 37.70% |
| £35k Deposit | 88% | 4.75% | £1,373 | £3,916 | 35.06% |
What’s a Healthy Percentage of Income for Mortgage Payments?
It’s generally advised that homeowners should spend no more than 30–35% of their net monthly income on housing, including mortgage payments, property taxes, and insurance. This helps ensure that homeowners can comfortably manage their other expenses and save for the future.
- In Scenario 1, the couple spends, at most 22% of their net income on housing, which leaves ample room for other expenses, savings, or unexpected costs.
- In Scenario 2, the couple spends, at least 35%, hitting the upper limit of what is generally considered affordable. This leaves less flexibility for other financial obligations or savings.
Lifetime Cost Comparison: 26-Year Period (2024 to 2050)
Here’s a financial breakdown of the total paid, net profit, and ROI for each strategy:
| Strategy | Total Paid | Net Profit | ROI | Total Interest Paid |
|---|---|---|---|---|
| Stay in £150k home (£7k deposit) | £268,560 | £46,440 | 17% | £125,560 |
| Stay in £150k home (£20k deposit) | £222,372 | £92,628 | 42% | £72,372 |
| Stay in £150k home (£35k deposit) | £192,780 | £122,220 | 63% | £57,780 |
| Stay in £280k home (£7k deposit) | £544,740 | £43,260 | 8% | £271,740 |
| Stay in £280k home (£20k deposit) | £460,752 | £127,248 | 28% | £180,752 |
| Stay in £280k home (£35k deposit) | £428,232 | £159,768 | 37% | £153,232 |
| Buy £150k home, then Upgrade (£20k deposit) | £364,608 | £135,192 | 37% | £123,108 |
Practical Considerations: Space and Lifestyle
While staying in a £150k property might be the better financial decision, it’s important to recognize that this doesn’t always align with the needs of a growing family. As children are born, or as your lifestyle changes, the logistical constraints of living in a smaller home may outweigh the financial gains. This is where the upgrade strategy shines—by allowing you to start small and upgrade as needed.
Why Upgrading Makes the Most Sense
- Affordability First: By starting with a smaller, more affordable home, you ease into homeownership without overextending your finances.
- Building Equity: Over 5 years, the equity gained in a £150k property can serve as a sizable deposit when upgrading to a larger home, reducing the loan-to-value (LTV) ratio and lowering future mortgage payments.
- Future-Proofing: The flexibility to upgrade means you’ll have the space you need when the time comes—without sacrificing your initial financial stability.
Conclusion: The Upgrade Strategy Wins
Although staying in a £150k home may appear to be the best option financially, it isn’t always realistic for families planning to grow over the years. The upgrade strategy offers a more balanced approach—allowing first-time buyers to benefit from lower payments and equity-building in the short term, while positioning themselves for a larger home when they need it most.
For first-time buyers, it’s important to think long term. The £150k starter home provides an excellent financial foundation, but an upgrade within 5 years ensures you’ll be prepared for life’s changes without compromising on your quality of living.
What do you think? Let me know your thoughts and feel free to get in touch here!
