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?

I would be cautious here TBH. Most likely homes in London will increase a great deal , its true. However what if one or both of you loses your jobs ,maybe or cannot work for a while . If you do your sums and think it is affordable for you then go ahead .However be mindful of interest rate rises which will make the payments increase a lot?

@ByHook0rByCrook

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.

This

I would do it. Prices are rising and it probably won’t be doable in future.

@Cheesechips I don’t think it’s a wind up for a second. London house prices and incomes make it a not uncommon mortgage level and because London prices are pretty safe from massive drops a fairly sensible investment

It depends how you view it..... It is not an investment. You could look at the interest payments as a type of rent with security of tenure, so long as you keep your jobs/ have a secure income.

You would need to factor in a savings plan that would make up any shortfall in equity if the market drops below your equity share.

You will also have to have a plan for retirement - but I guess if you have £600K plus equity now you should be able to down size relatively easily.

My reservations would be that in a sinking market your equity would decrease but the amount owed would remain static - so your % ownership would decrease. ie you put in 600K borrow £400K. Property value decreases 10% your loan remains at £400K but your house is only worth £900K and therefore you have lost £100K.

Also the market is quite heated atm but softening so you will be paying in part a hope value of the vendor.

I couldn't live with the financial risk. Unless you have a back up plan that would counter in the worse case scenario. You need to factor in the house price rise is affecting the country especially with the change in living styles due to covid. Negative equity is possible if interest rates affect the affordability of houses which of course it will. Does your life insurance cover the mortgage, do you have 6 months of savings incase you lose your job etc. I think it's nuts

[quote Trolleedollee]@Cheesechips I don’t think it’s a wind up for a second. London house prices and incomes make it a not uncommon mortgage level and because London prices are pretty safe from massive drops a fairly sensible investment[/quote]
We live in London, but the grim outskirts. Our house was 335k for a 2 bed 3 years ago. Currently paying £1300 pm repayment mortgage. Wouldn't dream of interest only and would much rather a smaller house that we can afford.

The thing with London is its a global housing market. I'd be looking at global market forces before I decided.

I get the logic, it would be like renting for a time but with equity in the property that could go up or down.
Then downsize to equity level whatever that is in ten years once children have left.
I don’t think it sounds crazy.
Beware utility charges though for a big house that could be a few hundred a month but if you can afford that go for it!

I don’t see the financial risk? You will own 60% of an expensive house. That’ll remain the same even if prices drop a bit so you’ll easily be able to downsize later.
I think of interest only like renting but without the threat of being turfed out by private landlord with 2 months notice.
Interest rates going up are a risk so a long fix is sensible

Would much rather buy a cheaper house outright if I had a huge deposit like that. Depends on how much space you need and the area.

I sound silly but I didn't know you could get interest only mortgages anymore unless you had other assets/investments. I live in London too, in a very ££££ area where a detached house also costs over £2 million and a small terrace costs £1 million. It makes sense that they are rising if people are doing interest only mortgage.

I know someone who has an interest only mortgage on a much more modest house- bought off 650k in 2013 on a 4 bed house in a not so nice area of London (but in zone 3 and near excellent transport links). Same house is probably closer to a million so it seems to have paid off and I don't see it falling. If it's a detached house in zone 3, I don't think it would fall regardless of demographics cos they aren't building detached houses in London and there would always be rich people who want detached but need or want to live in London.

Banks ask how you'll replay the capital, eg a pension lump sum etc. I don't think just selling the house is a valid way. So I'm not sure you'd qualify.

@Grumpyoldpersonwithcats

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

This. It’s a big gamble. The world is very unstable at the moment. Also your estate agent is likely bullshitting you, I live in London and I don’t hear of interest only mortgages much. And while your salaries may cover it now, there is no guarantee they will in 15 years - you may continue working in your late 60s/70s but you may not earn so much, plus health issues might make working impossible.

I think you need to think more creatively. You mention school fees - if you are paying then you don’t have to worry about catchments, is there a cheaper area you can move to that’s next to a more expensive area with good private schools?

Detached houses are pretty luxurious in London, most of the very well paid people I know are still in semis.

If you paid of your mortgage on a small house I bet there are better solutions. Don’t be fooled by estate agent sales talk and lifestyle porn.

@Lottle

Banks ask how you'll replay the capital, eg a pension lump sum etc. I don't think just selling the house is a valid way. So I'm not sure you'd qualify.

I’m interested in this part as if all it took was rising house prices we could find the housing sector fairly precarious on more doing the same

Not many people can afford a detached house, especially in London.
What if one of you can't work.. reality in my house right now. Happy we didn't move.

Yes I would do it. I did with £half million mortgage but I went repayment and not interest only and I see it as 'renting'. We have no intentions to pay off mortgage and will downsize in future. I do have security elsewhere in the form of buy 2 lets as well as savings and pensions. I don't think I would have jumped all in if I didn't have that security. I would say if you have savings at least 6 months worth, then go for it.

What's your plan for if something unfortunate were to happen to you or DH and you were left with only wage coming in?

I know I don't live in London, but seriously you could buy a hell of a lot more for a million near where I live. Half a million would get you a large detached and garden near nice schools.

A friend of my dh and his wife have lost their house- it was interest only, bought in an overheated market, the downturn happened, jobs were lost, sh*t happened.
My dh works in finance and thinks interest only is nuts- but he is very very cautious.

I'm pretty sure you can't get an interest only mortgage on your main residence without proving you have a repayment vehicle in place and downsizing wouldn't be considered an acceptable back up plan. So I'm intrigued how you think you'd get an interest only mortgage? Personally I would never take out interest only on my main residence, it's too big of a risk

@radioactive4
£1500 a month repayment on £1.3m is very affordable!

It's NOT £1500 a month repayment, it's £1500 a month interest only. The monthly mortgage payments will never reduce the capital owed

Can you not move out of London, send your child to an equally good school, and buy a house worth what you’re selling? A child’s education can’t be worth the risk?

A detached house with parking in a leafy street in London IS a mansion!

Why do you need to pay school fees if you could move into an area with great state schools? London state schools are great, plus you clearly have the capacity to pay for lots of extra-curricula.

Why wouldn’t you take out a repayment mortgage and drive down the capital loan?

Paying all that in interest every month is akin to rent.

Does it have to be detached with a drive? Most people I know in London with big incomes live in posh terraces. Or further out.

Paying off your mortgage was presumably a priority for you (as you paid it off before your kids are out of primary), but now you want to pay years of interest payments with no reduction of capital?

I am not a financial expert by any means but it all just sounds as if the broker is leading you to run amok in a sweetshop.

In London this is commonplace and known as ‘renting from the bank’. Get a long term fixed rate and - worst case scenario - you’ll be living in a house perfectly suited to your family’s needs while they grow up, with a far cheaper rent than you’d pay in the private rental sector.

Best case scenario you make a tax-free profit on top because of the leveraging.

If you’re offered this level of borrowing the bank knows the score with your finances, pension and investments. Keep a year’s mortgage payments in premium bonds and do it.

what level of interest rates could you afford, because a significant increase (and it was 15% when I bought my first house) will both increase your payments but could also destabilise the housing market. I'd also consider whether, if we had a change in government, they would prop up the housing market as much as this one does. If you've taken that into account and you're comfortable with the risk factors then essentially what you're doing is investing your savings and borrowings in a commodity which also provides you somewhere to live