How far up the housing equity ladder are you?

Homeowners are taking longer to repay their mortgages than before the financial crisis, despite putting down bigger deposits when they first buy a home.

In 2007, the average homeowner had netted at least 70% equity in their property by the time they were aged between 51 and 55. But today borrowers are waiting five years longer to reach this milestone.

Younger borrowers are also putting down bigger deposits than they were a decade earlier, according to insurer Royal London.

The typical 18 to 25-year-old put down 10% to 15% as a deposit last year, compared with just 5% to 10% for the same age group in 2007.

Despite this, by the time homeowners are aged between 26 and 30, they are typically sitting on an equity stake of just 15% to 25%, compared with one of 25% to 50% for the same age group in 2007.

Becky O’Connor, personal finance specialist at Royal London, said: “Moving up the housing equity ladder helps you to access better interest rates and makes homeownership more affordable.

“But as the age of first-time buyers has risen, families are having to wait until later in life before they make a serious dent in their mortgage and can benefit from lower rates.”

Why is this happening?

Royal London attributed some of the difference in equity levels to more stringent affordability rules introduced for lenders since the financial crisis.

And changes to the rate at which house prices are rising has also had an impact.

Homeowners accrue equity in their properties faster during periods of high house price growth, but in the current subdued market their main means of increasing the proportion of their property that they own outright is through mortgage repayments.

Who does it affect?

Borrowers are typically aged between 36 and 40 before they have at least a 25% equity stake in their home.

And it is not until homeowners reach the 51 to 55 age bracket that they own at least 50% of their property.

The proportion of borrowers above the state pension age of 65 who need a loan of between 30% and 50% of their home’s value has been steadily increasing since the financial crisis.

Last year, 27% of 66 to 70-year-olds were in this position, compared to 21% in 2009.

What’s the background?

While owning a bigger share of their property might make homeowners feel good, there is a practical and financial side to having a large equity stake too – mortgage rates are typically lower for people who are borrowing a smaller percentage of their home’s value.

A best-buy two-year fixed rate mortgage for someone with only a 10% deposit or equity stake is 1.84%, but this falls to 1.54% for someone with a 40% stake.

As a result, annual repayments on a £200,000 mortgage are more than £350 a year cheaper, giving homeowners more money to play with if they want to make overpayments on their loan.

Top 3 takeaways

• Homeowners are taking longer to repay their mortgages than before the financial crisis

• In 2007, the average person owned 70% or more of their home by the time they were aged 51 to 55, but today borrowers are having to wait five years longer to reach this milestone

• Younger borrowers are also putting down bigger deposits than they were a decade earlier