Should we take out a £1 million interest only mortgage?

[Scandala]

The following relates to London and it will sound utterly absurd to nearly everyone. We live in an ordinary house but have lived here so long we are climbing the walls. Mortgage is paid off (I know we are super lucky). We want to move closer to DCs’ school/s into an area that is sadly far more expensive. Stamp duty is crazy and it seems next step up on housing ladder in this area costs at least £1million more! This is for detached house with parking in leafy street, not mansions. Was astonished to hear broker telling me we are typical of people buying in that bracket and that they all take out interest only mortgages. The interest payments are no more than £1500 a month for £1.3 million. Our equity would be about 60%. Thing is, houses in the target area have soared. If they double in a decade in the same way that our more modest house has then isn’t it a better investment? We are mid-40s and 50 so not young. DC are still in primary school and we have years of school fees ahead of us. Combined earnings mean we ‘qualify’ for that size mortgage and can even go higher. Nervous at thought of starting again though but I guess it’s now or never. Are we mad?

If they double in a decade

And if they don't? What are your plans then?

Way would be your plan for paying off the mortgage?

What will your plans be for paying off the mortgage? Downsizing?

You can't predict what the housing market and interest rates will do in a decade.
I wouldn't takenout that mortgage personally,

OK - I'll be a prophet of doom.
House prices do sometimes go down (I'm old enough to remember buying in London in 1988 and selling in 1995 at 60% of the 1988 purchase price).
Interest rates are now (finally) going up.
You'll be paying off this debt into your 70's.
So I wouldn't.
But lots of people here will say I'm talking bollox

Yes you are mad.
If you can’t afford a repayment mortgage now, what makes you think you’d be able to afford it in 20 year’s time? One of you will be 70, so presumably retired. It honestly sounds like you’re living in a fantasy world.

How would you pay off the mortgage? Or are you basically looking at paying rent, and then selling?

Our house is worth about 25k (10%)more than when we bought it over a decade ago. You cannot guarantee house pice rises.

Thanks for the feedback. Really interesting points. We would never pay off the whole mortgage - it would not be our intention to do that as we would move/downsize when the DC left school. But if we had, say £1.5m initial equity in a £2.8m house and it doubled in value in 15 years then we would have ‘made’ more than if we stayed in our £1.5m house, which if that doubles in value will still always be worth less than the house in the ‘nice’ area. I am normally very risk averse as is DH but we look at friends and colleagues with lower incomes who have taken on more risk and it has paid off.

I don’t think it’s that crazy but you’d need a plan for when interest rates rise. Perhaps you can lock in for a 5 year low fix now and have 5 guaranteed great years in it for £1.5k a month. Doesn’t sound unreasonable. But in 5 years base rates could be 4 or 5% then if you couldn’t afford the mortgage you’d need to sell. If you have 50% equity in it anyway it’s not such a wild idea even if prices are slightly lower (and there’s a better chance they won’t be lower than they are now) but you’d have to work out how you’d then feel about downsizing / moving away. Personally I would be very tempted to do it.

That idea is crazy.

And any gain you do make is capital gain tax free as it’s your primary residence (unless that changes in the future)

Doesn’t sound ridiculously daft,

What would you do if the market didn’t keep going up? You could end up with a ton of debt and in negative equity. The risk isn’t with it IMO. Perhaps speak to another FA for more advice?

I don't think it sounds crazy at all.

£1500 a month repayment on £1.3m is very affordable!

I would not do this at your ages, and right on the cusp of massive price increases on everything, with the potential for a recession. Extend your current mortgage-free property, if you have to, but for God's sake live within your means.

What could you afford as a mortgage if you didn’t do interest only?

Presumably your way out is to sell and downsize.
How would prices have to fall to prevent you doing that? Eg you buy at £3m with a £1.3m mortgage and £1.7m equity. Prices drop by 40%. House is now worth £1.8m and your equity is down to £500m. Meanwhile your old house which was previously £1.7m would now cost £1m.

Obviously such a significant drop is unlikely but not unheard of. As you say, prices might go up- who knows?

I’d probably do it, to be honest, but have a plan in place in case it all goes tits up.

A lot of people do this then downsize so crack on. I'd take a fixed interest only though...

I think the only watch out I can think of is if you are going for a huuuge house these are less desirable when selling due to ongoing maintainance. I am talking 6 + bed detached houses with large gardens/grounds.

In my area (suburbs of london) these are generally only selling to developers who tear them down and rebuild "mansions" which look like a house but are flats. They have underground carports full gyms etc and contain 3-5 flats all selling for 1-2.5m each.
Basically be sure on resale...

I actually think it’s an excellent idea. Look at fixing for even 10 years. Its so unlikely London house prices will drop to the point where you owe more than the value of the mortgage it’s not worth thinking about. To be approved for a £1m mortgage you clearly have a high income and I would plan to pay off chunks as you can. Makes real sense and I agree, a good investment

If you can get approved for the mortgage (given June if you is in their 50s) then by all means go ahead. You’ll have 60% down so if prices drop, you’re not likely to be in negative equity as if you sold, you’d cover the mortgage (but lose your investment). My DH freaks about having debt and has been all about paying down the mortgage before he retires at 60. He’s mid 50s currently. The plan though is to sell up and move to another area to experience the area and live in what to him has always been a dream of a character house and lots of land (he does no gardening, not even cutting our postage size lawn). Clearly not practical for retirees once we get into ill health but the plan is only for short term. Like you, relatively short term in the scheme of things. We do have our pensions sorted, not reliant on house sale to fund retirement. So provided you have a plan (move) to pay off the mortgage, have a pension (so not reliant upon for diving in the future for pension) and realise there may be a risk of not doubling your money, then by all means go ahead.

Can you easily afford the interest payments and still have a good quality of life? Are you expecting some payout that will ultimately cover it (e.g. pension drawdown at 55, guaranteed inheritance, company sale)?
Not wishing to be nosey but it would be good to know where. Some areas of London have peaked in my views: others will continue to hold their value and some outer suburbs have suddenly got popular as their high streets shape up and the benefits of large gardens and off-street parking with electric points become more obvious.

Surely this is a wind up post?

If you qualify for that level of mortgage surely you can afford more than £1500 pcm repayment? What can you afford with a repayment mortgage? Is there anything in that budget that is a happy medium?

Thanks @Cheerfulcharlie, that’s certainly a consideration. The worst is when you are forced to sell up.
My other thought is: where will all the baby boomers go if they don’t want to land their DC with massive inheritance tax bills? Area we are looking at is stuffed with people in their 80s whose children have long flown the nest but they’re simply not selling up. It’s their home and their right to stay obviously but I would hate to rattle around a large house that needs constant main entrance at that age. Could we see a mass sale of homes in the next few years as baby boomers scramble to down size? The prediction is prices won’t drop for another decade or so. We cannot wait that long obviously but at the same time, is it foolish to buy when demographics could stuff us? Or is London over time usually a one way bet?

We’ve just done it and are thrilled with the move.