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?

It’s the sort of thing that could makes sense but is psychologically hard to do. There are some very cheap 10 year fixed rates at the moment. Lloyds is doing one for 1.66%. I’d only contemplate your plan on a long-term fix but over 10 years you could be paying £250k in interest with no guarantee of house price growth to match. If you’re happy to view it as sunk costs for a bigger house that’s fine but as an investment, 250k into pensions could be much more lucrative given the tax relief.

The main thing I’d be wary of is it sounds like a lot of your wealth would be tied up in property. I’d be much less comfortable with your plan after you said ‘Dh has an ok pension and mine is a bit rubbish’. On your incomes your pension shouldn’t be a bit rubbish. Your buy to lets obviously give you more than many and may effectively be a pension but it seems a lot of your wealth is in property.

Thanks @Bunnycat101. The pension rules have now changed though and if you earn six figures, I think the taxes are punitive? Will look this up now…

Only really punitive if you are over the lifetime allowance (in which case your pension won’t be rubbish) or £40k annual allowance. You really want to be getting the most tax relief you can.

Personally I wouldn’t do that. I would perhaps remortgage take out 500k equity and buy a buy to let or invest it in the stock market conservatively.
If you buy a multi million pound house you are just throwing money away with stamp duty and sounds like your current house would suit you long term.
Selling those multi million pound houses with huge stamp duty is only going to become harder.

@Bunnycat101 I fear because DH’s income including bonus is up to 240k before tax he can’t save more than 10k a year in a pension without being hit by a high tax bill. I on the other hand will be able to.

@Adastraperaspera We have two buy to lets already so probably wouldn’t take on more given the taxes/hassle factor. We max our ISAs every year (but have only been doing that for last three years as we were over-focused on paying off mortgage through our offset). We have two lots of EIS investments, one that has quadrupled in value to about 200k. We don’t really buy shares outside our ISA pots but maybe should think about it. DH also put about £100k into crypto 😱😬 in a departure from the usual conservative approach.

Having an income above the taper threshold is a nice problem to have but definitely worth maximising your tax allowances. Have a look at the latest guidance for your dh though as don’t think it is a flat £10k anymore but a taper that might allow him to put more in.

Although your DH h may not benefit from adding to his pension it certainly seems to be the most tax efficient way of investing for you. If you really want/need to upgrade your home, taking out the mortgage would be a good way to do it but I would view it as a cost rather than an investment. Once you include stamp duty and the interest payments, this move will cost about £500k (or more). You may or may not make that back in your new home and at the end of it, you will most likely need to sell up and downsize.

No I wouldn’t take the risk. As an OP says, house prices have previously fallen significantly so the risk of being liable for the extra mortgage ££££££ without the house value to support it would keep me up at night.

I would also take the broker’s story that ‘everyone is doing it’ with a huge pinch of salt. What does he gain if you take a mortgage through him? What other sources back this story up?

Yes others may have taken a risk that paid off - this doesn’t mean the same will happen for everyone, that’s the nature of the risk (vs guarantee) part. You have to be comfortable with the possibility of the worse and worst case scenarios.

Good luck with what you decide op.

I think if you can't afford this house you are contemplating without going interest only, you can't afford it.

Priorities for us were:
Home (paid for)
School fees
Pension provision

Extras in the context of bigger/better came after that. If you don't have the former sorted, it all sounds a bit fur coat and no knickers. If you can't pay for a bigger home you can't afford to move at your life stage.

If you already own buy to let them stamp duty on 2,800,000 would be 333,333? So you would need a 12 per cent increase just to recoup costs? Coupled with the interest payments over 10 years you actually need the property to go up at least 25 per cent to make proper money? That would be too risky for me given your ages. Wouldn’t remortgaging at 60 be a problem?
I would diversify further into equity, bonds, maximise kids isas, think ahead regarding buying further buy to let’s for the kids and minimising inheritance tax. At 18, they can own property and cover uni fees that way.

I do understand though why you are thinking about doing this given all the talk about higher inflation. Whilst borrowing cheaply now looks like it might make sense I would be worried about having to sell at a specific point with high interest rates into a less than ideal market.

Financially the biggest problem I can see with this (once you are comfortable with the risks) is that if you are only planning to live there for 10 years then downsize that is an enormous amount of SDLT to be paying (on purchase of new house, and then on next house when you downsize)

If this is our main residential home -
and assuming we sell our existing one - I don’t think we need to pay additional stamp duty even though we have a buy-to-let @Adastraperaspera. To be honest I would be happy if we just got most of our money back and were able to buy somewhere smaller but in a decent location afterwards. Ten years is the minimum time frame - our youngest is only 8. It’s DH’s age that’s the worry - I agree! I was amazed at the idea that we can get a loan of nearly 2m when I thought 1m was crazy enough (and the figure I’ve put in the title is 1million. I should add that the reason I have put ‘interest only’ is so that if one of us loses their job we can still afford to pay the monthly mortgage and because shoving money into investments other than paying off bank interest would actually allow us to overpay lump sums or keep our money liquid.

I agree on the fur coat and no knickers @RosesAndHellebores. Our combined income in the next tax year will be over 300k (again I realise we are hugely lucky). Our deposit would be around 1.5million if we don’t take equity out of the rentals. Usually lenders will give you 3.5 to 5 times your annual income so presumably the sums add up for them and we are low risk. Of course, it has to add up for us too. As someone who has never owed more than a student loan in debt (and I personally only started earning decent money four years ago), this is all a bit terrifying. As it stands, we haven’t found a house and are waiting to see if the brutal competitive bidding subsides. DH is not comfortable taking on a massive mortgage but to move to the target area (which isn’t Chelsea or anywhere OTT), a house that is smaller than ours would be £2 million. To get a similar house to ours but with parking/bigger garden, it’s upwards of £2.5m. And for 10% more, you start getting the more ‘wow’ houses. If the market crashes, I think it will be the ones under 2m which will prove harder to sell whereas the more expensive ones are better value in that you actually get something vaguely substantial for the money. I agree with your priority list too. For us (well for me), school comes first. As for child ISAs, I’m still worried about them getting control of substantial savings at 18!

@Scandala

As per my previous post sometimes these things work out. My friend bought a London house in 2000 for £800k. She has just sold it for £16m. And she didn't do any work other than a fancy traditional kitchen which has never been updated.
Conversely we paid £600k for a Henley on Thames house at the same time and it would be £1.5 now.
If you have no othet debt it is worth considering to get good secondary schools. Go shopping first because there is very little around. We are finding it so soul destroying.

I certainly wouldn't give 18 year olds access to large amounts of money but if they were used to fund uni fees/living costs? We set up trusts for ours in 2011ish with that intention.

I'm generally quite risk-averse when it comes to cash but with the amount of equity you have I think it's actually a decent idea. You'll have the perfect family home and then sell up when you can downsize. There would need to be a catastrophic, global financial crash - much bigger than anything seen before - for you to start to be in trouble.

@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

I agree with you, I can remember these crashes too.

Would your Council tax be a lot more? Would your energy bills increase?
It depends on whether you are happy to take on a risk you don’t need. Personally, and I am an old woman, I think peace of mind is worth an awful lot. How secure is your employment? I have found that life is full of the unexpected. Recently, a couple I know moved to a much larger house from a comfortable smaller property because the husband had a good pay increase. Unfortunately, he lost his job not long after moving and he has had real trouble finding anything on a similar pay scale. This has caused a lot of distress that they need not have had. Plus the Council Tax etc was more than they expected. However, it could work for you and you are obviously a more optimistic person than I am. I have experienced several downturns of a completely unexpected nature in my 80 year old life and this is where I am coming from.

Well simplified it’s a bit like a 1.5 million deposit and 1.5k a month rental until you move on.

I think on that basis the ?main risk is that your 1.5k a month ‘rent’ is flexible at the whim of interest rates. I am old enough to remember very high interest rates and at the time the impact on families and house prices and negative equity was brutal.

So many more unknowns of course but I can see why the idea would catch your eye.

The few properties that are coming on the market are just insanely priced - we are talking at least £500k over what they were selling for last year. We are not prepared to pay that. We bought our current home just after the last financial crash (it was still more than we wanted to pay but it was on for the market for ages and in hindsight, secured it for a good price). I think we will wait for the right house at a non-bidding war price. Of course, in the meantime, we are getting older (particularly DH bless him) but I would hate to pay the premium for buying in a white hot market. I would rather take a ten per cent hit on my house and gain a ten per cent discount on the next if we are upgrading. At present, however, houses seem to follow the same pricing trajectory as diamonds. Every tiny fraction over a carat seems to attract a disproportionate premium, ie a four bedroom house with a large garden can be twice as much as a three bedroom with a smaller garden even if the square footage difference is only a quarter to a third.

The first time I heard if someone doing this I thought they were insane and living well beyond their means but given the crazy London market I can see why it makes sense. Psychologically I think you have to be prepared to accept you will need to downsize or move out of london at some point, but if you are ok with that then it makes a lot of sense to give you the house you want now.

Again, this is where I think people living outside London and SE actually have it a lot better in terms of standard of living vs actual salaries. I can’t imagine there is such a need to consider buying in this way elsewhere. OP clearly has a very high household income but it is insane that it doesn’t stretch to buying what might be considered a fairly standard family house for a high earner in other parts of the country!

OP sounds like you have a well diversified portfolio that means you are not too exposed in this scenario. I think you should go for it.

For me there are two main considerations:
A we are in a very unsettling period which is about to get worse. Inflation is up, we may be at war soon. Sound gloomy but not completely crazy.

B if you need to move in 5 yr time due to high interest rates, do you have the energy to start again in a new place? Plus all the costs involved in moving. Too stressful imp

You are mortgage free and have school fees to pay. Can you not just move to a similar affordable property and enjoy life with some peace of mind? Do you really need £1m plus house?

@Scandala such an interesting thread, I don't think this is completely crazy by any means. Which bank offers interest only at that scale of borrowing?