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?

Well it’s both. High earnings combined with keeping outgoings low.

I wouldn't consider the spread of a 1.5m house, 2 BTLs with 450k equity, other investments keeping outgoings particularly low. That would have required quite an investment in the first place and I assume salaries haven't stayed the same for 20 years. You couldn't achieve the above with 10k now.

@LizzieMacQueen It depends - Does stamp duty still depend on whether the house is held in an offshore company where the overseas shares can be sold without changing the ownership of the underlying house triggering stamp duty or has the government ending that tax saving approach that favours the wealthy?

I'd say stay where you are and start enjoying life a little more.

You don't say how old your dc are but I'd say 10k pcm less school fees (4kpcm plus £1.5k mortgage) doesn't extrapolate to that much if it includes both your salaries and the rental income. That's £4.5 left pcm, net off community charge, utilities, cars, insurance and that's closer to £3k. If your dh were to lose his job or become too ill to work you would likely be stuffed and have to sell up to meet your outgoings. That would not be helpful in a falling market.

You need to cut your cloth op. Stay where you are or move out a bit.

Forget whether it will increase in value.

If it stagnates at the same value, is it worth paying £1,500pcm rent every month for 10+ years? (Or however long until your DC leave school).

Forget the investment side of things- this is a lifestyle choice. (I know this is the investment board but your main residence is never really “an investment” in the same way S&S or rental property is.

You have children at private school to pay for - if you can afford their fees and an extra £1,500 rent a month, and it will improve your family’s quality of life, that’s a valid decision in itself.

There's no reason why you can't do it OP but I would weigh everything up. I wouldn't rely on prices doing anything like they have historically. What will interest rates & the house market look like in 5 yrs (I don't think it will be great, we are moving this year). The market for 2m plus homes is smaller so things will take longer to sell. Remote working has meant there is less demand & that trend will continue.

Sorry just to clarify as lots of figures are being bandied around: our deposit would be up to £1.5million so anything above that would be a mortgage. I anticipate we would have 50%-60% equity.

Two independent brokers have said it’s doable. Of course I’m anxious re debt!

Income without me working full time after tax is 8k-9k, with me working it’s about 13k. Again, realise we are very lucky.

Our current area (zone two) and house is maxed, side return extension done. Adding more bedrooms (already four/five) wouldn’t add value. End of terrace. Lovely road but crap secondary schools depresses the prices around here for much bigger than average Victorian semis and terraces.

We are a bit bored, have never lived anywhere for so long.

Car repayments will never eat into our finances as we are more likely to pay 20k for a secondhand car up front than take on a lease etc.

DH thinks money much better off in high risk investments than paying down mortgage (now that we have done it twice, we should really have leveraged more).

Very interesting the poster above who said wrong time in the cycle - can they explain more?

How much could you borrow for the £1500 repayment?

@BirdTurd

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.

I think the plan totally makes sense. Ihave just moved out of a similar property -detached/leafy area/good schools/large garden -bought for 220 when the kids were toddlers and now worth about 2m. Buying two smaller for cash from the proceeds and both of intend to mortgage interest only and give the cash over the years to the kids to avoid inheritance tax.

Very interesting the poster above who said wrong time in the cycle - can they explain more?

It wasn't me but I agree. You ideally want to take the risk when the potential gains are the greatest.
House prices are not going to change much in already expensive areas & interest rates are going to increase plus increased cost of living. If you have 1.5m equity you've obviously seen how much prices have increased. How has performance been since Brexit?

@hirafffe you make some excellent points. It is really weird as in the area we are looking, everything £2.5m-3.5m is immediately snapped up if it’s in the ‘right’ location more modest houses from £1.2m-£1.8m are staying on. I think people who want to buy, say, our house are more likely to be hit by the cost of living crisis whilst those further up the ladder are more immune. Looked at a ridiculously expensive home recently - circa £3m - which the owners had bought for 850k in 2005. We bought ours for nearly 700k in 2009 and it’s worth £1.5m now. The other area has just always been more traditionally desirable whereas ours is a ‘cooler’ place but far less established.

@hiraffe that was for £1.3m mortgage which seems crazy as a double bedroom flat would cost more than £1500 a month to rent vs a detached house with five bedrooms and a 130 foot garden etc!

To my surprise, there has been a mini stampede for applications to independent schools in London since the pandemic. That’s because people could sadly see the difference in provision between SOME schools. I do however know of some private schools including one that’s always in the top 20 in the country, that had really bad remote provision!

Buying two smaller for cash from the proceeds and both of intend to mortgage interest only and give the cash over the years to the kids to avoid inheritance tax.

But you will have CGT on one & IHT bands have frozen so more to pay. I honestly think a wealth tax is coming in the forms of higher CGT & IHT.

@JangolinaPitt that’s a really good idea. All governments in future will need to tax wealth to make up the shortfall in the working age population. Am as stunned as everyone that Brexit has not killed the market in London and nor has Covid.

@Scandala you may be right that the 2.5m market is more "bombproof". I know 3 families who left London recently because for the 1.3m house they want off street parking, big garden etc not a terrace.

That is a very good rate, could you fix that?

Yes the gov needs to support the ageing population & the health & social levy is a drop in the ocean.

Yes @hiraffe that was the payment for a two year fix but a five year would be £1600 a month. I should add that we haven’t found ‘the house’ yet! They’re snapped up too quickly. I’m reading that some people are beginning to drift back to London, having sold up thinking they would never have to come back to the office! I resisted the urge during lockdown to sell up and live happily ever after in some vanilla village in the Cotswolds as I think ultimately, it would be too conservative a way of life for us!

I think the risk is that house prices are particularly high at the moment so there is potential to lose out financially if there is a massive dip which takes years to recover to this point again.
Sorry for the doom and gloom .. if anything happened to either of you/ both of you would it be beneficial for your DC or would it end up being that a large amount of debt would be passed down to them?

@twodayisarightoff that is really interesting. I’m sorry your parents seem broken over the move. It is certainly food for thought. One of the things we like about the target area is the long term community feel of the place. Our current area is full of Victorian conversions - cool but more transient population (apart from the artists who have been here since the 1960s).

It could definitely pay off but is a gamble.
Get help to look at worst case scenarios.

In the 1980s interest rates went up to 15% and then all of a sudden too the dreadful Poll Tax was suddenly imposed bringing tax way up in areas that had had low rates before. People had no way of paying.

@Wam90 you’re right it is a worry that the market is over-heated. We are the wrong age and this is the wrong time but if we wait for the market to cool, it may not ever happen and we are getting older every day.

My view of areas as you asked ..

Possibly maxed out: those former up-and-coming areas like Hackney, Hornsey, Dulwich etc. More susceptible to people moving out of London entirely to get the schools, garden and detached house.
Areas that will always hold their value but are too £££ for most mere mortals: detached houses at £4+ million in St John’s Wood, Clapham, Hampstead..
Areas with more growth to go are further out in the suburbs where high streets are booming with WFH and people leaving zones 1&2 for decent outside space: Winchmore Hill, Wimbledon, Whetstone, Stanmore, Epping, Buckhurst Hill. None glamorous or trendy but gardens, good schools and decent stock of detached properties.

@ScrollingLeaves I’m the daughter of immigrant parents who lost everything in a crash. No one would employ them so they always had to take on risky self-employed jobs or small businesses. I think it has shaped enormously my conservative approach to money. DH was raised by single parent who always rented. I’m realising in my 40s (and DH agrees) that our risk-free approach has kept us less well off than we could be.

One of the things we like about the target area is the long term community feel of the place.

We are moving to z4/5 because we want a less transient community. Everyone has left!

@Scandala the people I know only moved to home counties/z6. They already had some wfh & it has just increased.

I did read that more FTBs left London then ever before to buy which I think will trickle through in a few yrs.

Your equity is likely very safe. It's just the gamble between paying the 1.5k a month & not gaining much. If you are prepared to take the hit you've still benefited from a home that you love & has fit your lifestyle.