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?

@Scandala

Having had a £1m mortgage 20 years ago. I would give you this advice. Fix the cheap interest only for 10 years. Put away at least £2000 a month to pay a chunk off at the end of each year. Ditto any bonuses.
Make sure you downsize whist you can still maintain the house and it looks current (we plan to do this in our late 60s, before the staner gets fitted!)
On a take home of £9k private secondary would be a push. Pay for clubs, music etc if you use a good state school. We did one private secondary, one state .
When you buy your last house you might want to give your children some of their inheritance as long as you are mortgage free.
We are buying a costlier house but have good pensions. Our DCs are young adults. They get what's left!

I agree @Scandala we have a similar income to you but have always been conservative with our investments and house buying but this is with the benefit of hindsight - If I could return to 2010 and max out on a £1m mortgage I absolutely would do but at the time it seemed a ridiculous thing to do.
The last two years have shown me though that anything is possible and I couldn't rule out a situation where we ended up losing a whole heap of hard earned money.

It really depends on your risk profile - my DH is the main earner and earns 3x my salary but if the crunch came we could afford the mortgage, food and essential bills on my wage alone. This has always been our benchmark and, you're right, with hindsight we are worse off as a result.

Thanks for the analysis @NewHouseNewMe! I would say our area is similar to the first lot you mentioned - the batch that included Hackney. I would put areas like Dulwich, Wimbledon, Highgate etc in your second category though - very established. I mean look at the crazy price of this house - it’s on the south circular!!! www.rightmove.co.uk/properties/119252237#/?channel=RES_BUY

Ime, it's not that crazy. As long as you have an exit strategy that takes into account an absolute worst case scenario of the house not appreciating in the meantime.

With the benefit of hindsight I wish I was born earlier or bought a house whilst doing my a-levels 😆

@SavBbunny did you fix for a whole decade?! I imagine the repayments for that to be far higher? Good advice re the putting income aside. We put away about 2.5k a month in ISAs currently; the rest seems to go into DH current crypto obsession! Yes it has ostensibly trebled in value in a year but in some ways I am a bit worried about what happens to the extra I’m beginning to pull in. I think people struggle to comprehend that 9k a month is a bit dicey when you’re paying 3k of it in school fees! I will be earning 5-6k a month after tax (thank you, IR35 tax law that makes me pay more than an employee with none of the benefits!). Out of interest, where was your home with the huge mortgage and did you move far when you downsized?

@sashagabadon

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

No the 60% is at risk.

The bank get their money back (the 1.3 loan) and the home owners take 100% of the market gain or devaluation.

new home
1.95m your house value
1.30m loan interest only
3.25m current market value.

Loan 20 years

At a minimum you want to keep current living standard of housing.

To meet the 1.3m loan over 20 years savings of £5,417pm are needed to pay the capital.

Other cost are 2 set of legal and move costs.

Interest of £1,500pm is "cost of living" in nicer area or rental payment on borrowed money.

But if MV goes up £18,000pa you "recover" the cost

So to stay in the home the year of loan falls due (2042) you need to pay back 1.3m

The plan, you to sell the house buy a new one.

MV+/-0%
Sale at 3.25m
1.3 to bank + 1.95 equity + (no +gain/ no -loss)
no extra money for your new house
YHV 1.95m as Cash buyer 1.95m
= Buy same house

MV+50%
Sale at 4.875m
1.3 to bank + 1.95 equity + (1.625 gain)
You keep the gain along with your equity.
YHV 2.925m as Cash buyer 3.575m = buy 'better' house

MV -20%
Sale at 2.6m
1.3 to bank + 1.95 equity + (-0.65 loss)
You pay 0.65m to bank from your equity
YHV 1.56m as Cash buyer 1.3m = buy a 'worse' house

If the market drops you need to sell asap

So if the MV remains the same the question would be what rise in interest rate would force you to sell the house.

What if you can't downsize? My children had separate accidents that left them both disabled and requiring care at home for years. The way the property market is going your children may never be able to afford to move out.

[quote satelliteheart]@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[/quote]

Yes I understand that ffs 🙄

I'll rephrase then: £1500 interest only monthly payments on a £1.3m loan is incredibly cheap.

@Scandala

We came out to the shires.
We had to sell as a distress sale as the mortgage doubled after the fix ended.
I became seriously ill and was the major earner. No valid insurance as company director.
My health and career recovered during the past five years.
Be careful with your savings. Keep as much as you can, top up your pensions etc.
We are taking up a interest only mortgage on a bigger house but i will also save twice as much again each month. Once bitten and all that!

That Dulwich house looks like decent value to me and I’m in one of the outer burbs where I think the growth will be in the next 5 years.
It’s still a risk though and you need to buy a finished article if renovations will be a problem to finance.

[quote SavBbunny]@Scandala

We came out to the shires.
We had to sell as a distress sale as the mortgage doubled after the fix ended.
I became seriously ill and was the major earner. No valid insurance as company director.
My health and career recovered during the past five years.
Be careful with your savings. Keep as much as you can, top up your pensions etc.
We are taking up a interest only mortgage on a bigger house but i will also save twice as much again each month. Once bitten and all that![/quote]
Is what you save better return than using that to create equity?

@NewHouseNewMe that house looks OK on paper but it’s on one of the busiest and most polluted roads in London - bumper to bumper traffic all day. Your ideas re outer suburbs is very interesting. @SavBbunny sorry to hear about your roller coaster ride with health and jobs. You’ve reminded me that in life, disruption is the norm. It’s a bit depressing to think that no amount of ‘earned’ money and savings is ‘enough’ to guarantee a soft landing in life! Anyone in a wealthier bracket has companies and offshore trust to mitigate this and various taxes. I totally think the govt - especially Labour when they get in - will go for the low hanging fruit of the London high earners (but they will never be able to catch the CEOs, bankers and oligarchs!) I’m anticipating massive taxes on school fees and even main residential homes.

We took our risks earlier op but nothing like you are considering now. I bought my first flat for £32k, sold for £95k. First House in 1986 for £125k (needed much work), sold 93 for £168k (only really broke even), second house for £320k and we were really, really stretched and people thought we were completely nuts as the area around the road was under development and we were adjacent to bulldozers for five years. The only reason we could buy it was because the builders who redeveloped an old house went bankrupt in the early 90s property slump. We had a few dicey moments as dh was early career and our first baby was poorly and I gave up work. This was also a time when DH played the stock market with interest free credit cards! However we sold that house just over 20 years later for £3.8m although we moved out in the final year of ownership to redevelop and renovate it within an inch of its life. In short: flat 1 was bought bottom of the cycle, house 1 close to the top (so made zilch), house 2 at the bottom and in a temporarily blighted area. Prices barely moved from 2005 to 2013/14 and have been stable since 2014/15. Taking into account home and international pressures and the multiplier required to buy London homes I can't see real house price growth for 7-10 years.

For me a house is a home as well as an investment and I would compromise in your shoes regarding my home.

Haven’t read whole thread but have you seen the other thread discussing a possible house crash? One article suggests a serious crash in 2026.

I don’t think it sounds crazy OP. Our house is worth about £1.1k and we owe £450k. Our current mortgage payments are approx £2k per month. We are looking at moving but need to go to £1.5k to get anything better so our mortgage payments are going to increase. I wasn’t aware that an interest only mortgage was a possibility but I would definitely be interested in that route if it was. We live 40 miles from London and have no intention of staying here once the DCs grow up. I am from the North originally so I am quite aware that I can buy a decent house for the equity we already have in the current house. Any increase in equity over the next ten years would be a bonus.

I think you also have to factor in the cost of higher bills: utilities, community charge and maintenance. Top sale prices are only achieved when houses are perfect.

That sounds like something I will love reading @Riverlee.
Do you have a link? Agree @RosesAndHellebores, higher council tax.
Current house is not that much smaller to be honest, just smaller garden and less desirable area hence lower value. We looked at a superficially ‘perfect’ house recently but very top end of budget and couldn’t add any value to it so didn’t offer.

Yes we’ve done this. DH is more of a risk taker then me and it still gives me sleepless nights. Not in London but in a very popular location. We are definitely selling in 15 years or so - the house is massive and listed and the garden is huge. It’s a lot of work! Our neighbours are in their 80s and struggle to maintain their property. There’s no way that’s going to be me.

One thing that makes me feel better is the that we could build on part of the garden if we had to so we could maybe get some more cash / wouldn’t have to move areas.

Ooh @Ablababla may I ask where? I’m guessing Brighton or south coast somewhere or Bath or Cotswolds? This would be the dream but only if I could transplant a bit of diversity/
Big city feel to more beautiful surroundings. Agree with it being too daunting to look after a massive house in old age. I’m quite partial to downsizing to an apartment in a country manor!

So sorry to hear about your DCs’ accidents @IheartJKRowling. I think we are too prone in western society at thinking that we will only get richer/healthier without recognising that curve balls are a certainty.

I think if you HAVE to stay in London for a myriad of essential reasons then it’s work considering

But your kids are little, there are great schools outside London which don’t cost the earth and the £1500 per month PLUS the stamp duty payment would surely adequately cover that

For £1.8m (if thats your current house value) you could live somewhere REALLY nice in a village like mine about an hour from London by train, loads of good private schools, but the secondary school options are very good indeed too.

Can you/dh work more hybrid and move out?

In some areas house prices never go down.

I bought my my first house in 1988. I’ve lived in 4 houses since that. They’ve all gone up and up and up.

I've always had an interest only mortgage. It's backed by ISA equity investments. It's been good for us, our current mortgage is 0.99% and we make 10-25% return on our ISA funds most years.

But we've found the hurdles for interest only mortgages have become increasingly difficult. For our last two mortgages, we've had to cover the full mortgage amount with liquid assets. So savings and equity investments.

But they would only take into account 80% of the value of our equity investments when we remortgaged a few months ago. And no future growth. We're lucky that our savings and investments covered the mortgage amount. But not everyone will have that. There is the option to get a mortgage with the house sale as the repayment vehicle. In the end, I think the broker did that for our last remortgage as our LTV is 25% so it was the path of least residence with the mortgage provider.

So it's worth bearing that remortgaging might be trickier than a repayment mortgage down the line.

• least resistance