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?

Brave move, as interest rates are predicted to climb, and climb.

@BoatingDown it seems quite a few (and I can’t remember all the names but I think they were a few bog standard high street ones). It’s under four times joint income so in their minds not a massive risk?

Anyway, the cautious posters including @nocoolnameleft will be pleased to note that we are not rushing into this. We are not recession-proof at that level of borrowing whereas right now if we both lost our jobs we could still things running for a while.
Wonder if the Russian sanctions will make any impact on the top of the market and thereby trickle down to lower levels. Interest rates caused by the current atrocities will certainly begin to bite. The houses coming onto the market in our target area are just insanely priced still but that’s partly due to lack of stock. Thank you for all the advice!

Oh my goodness that's horrific. Why don't you move somewhere cheaper out of London!

@Scandala yes, out of curiosity looked at hsbc and saw they did this. My husband reckons lots of people in London do this. Makes sense in the context of the jump from £1m to £2m or £3m houses. Keep us updated 😊

@coronafiona the move isn’t so much about getting a mansion but about being close to DC schools and community. We did toy with leaving London but we are foreign-born so enjoy the cultural mix here.

Its a tricky one but 3 months ago i’d have said go for it.
Today, if you Wait too long and there’ll be no good long term fixes

However unless the generals get rid of Putin quickly we are in for a rough ride for the next few years with huge increases in the cost of living and rather than a big garden you’ll be wanting a big bunker.

We have been used to free money and cheap energy for the last 14 years. 5% interest rates are not historically high but could you afford 4k a month in school fees and 5.5k in interest? Few could so you’d be selling along with everyone else.

I wouldn’t be rushing in now due to boredom or a desire to be a little bit richer.

Would be worth doing if you could find a ten year fixed rate mortgage. I would not risk it with a 5 year fix as base rates will be up to 2.5-2.75 by Xmas and if this continues another year then bank base rate of 4 percent might be here by Xmas 23.

If you have 60% equity and a Plan B to move to a much cheaper area if it all goes wrong and pay the mortgage back, then potentially it's a good investment.
Some interest only deals allow you to make lump sum repayments of a certain value so if you could afford to do that you'd own a little bit more each year.
It's like an investment if the house does increase in value as you predict.

I would do it if I could afford the interest rate if it increased.

Argh! The prices are getting more crazy day by day. We are being sent ‘off market’ properties by agents. Semis for close to 3m that either have small gardens or need total gutting. Meanwhile, prices in our own area (genuinely nicer properties, ace transport links but a little known area with not enough good secondaries) have not gone up by nearly the same amount. Does anyone think the Russian sanctions will have a trickle down effect on London property? Any estate agents out there have a view? Any economists out there with a view on when the baby boomers may start to sell up? There are loads of large five bed houses in our target area with single old people living there, many decades after their children have flown the nest. I have only seen one article in recent years predicting a fire sale of these sorts of properties in 20 years!

Would love to know if you did it?

We've always stretched ourselves but then our property has made massively more money due to the increase in value than if we'd stayed in our 3-bed terraced (never saw it as risky as we knew we could always rent it out and live in a smaller, rented house if needed).

We managed this through profits on three previous properties and by going interest-only but have been lucky in that in the last ten years or so, interest rates have been v low. Managed to nab a 10-year fix in May so good value there. Timely, seeing how things have developed.

I realise some people are more comfortable with the idea of repaying debt but we argued that, as a family of 5, we want to enjoy our spacious home now when the kids are still around and have friends over, and then downsize if we need to, though with a large house you always have the option of rejigging and renting a space out further down the line to cover mortgage payments.

The market is very different now so I'd love to hear what you decided in the end, OP!

Would be interesting to hear. I suspect the internet only mortgage would be more like £4k a month now and with house prices falling does not seem like a very appealing prospect.

Update for you: (it’s a boring one!. Nope we haven’t done it. Spending the money on kids’ education instead. By August, the notional interest only payments had crept up to over 3k a month. Must be 5k by now. @Wheretheskyisblue you are right!
Friends who did similar things just a year ago are paying 1.5k a month. We were looking to borrow between 3-4 times four times our income but we could not make the numbers work at a level we were comfortable with. It also made me think that if two people on high incomes with a very healthy deposit (own current house outright plus could have plundered a bit from a low value rental) cannot make the numbers work, then the only ones who this market works for are the very wealthy so it must be on the way down.

I saw some very over priced properties and warned the agents back in July that their vendors had six weeks before things went pear shaped so they should price realistically if they wanted to move. They didn’t listen and now those three houses remain stuck and have had prices slightly reduced but still no takers.

The only houses that seem to still be moving are way out of my league so in the 3.2m plus bracket. By the way, believe it or not these are not mansions. Just biggish houses in ‘nice’ bits of London but not ultra premium like Chelsea.

Stamp duty is a big deterrent too.
It will cost us 200k to move. I realise this is a very nice dilemma to have but I have also lived through a mortgagee sale with my parents and never want to put my kids through homelessness and such a brutal reality check early on in life.

@okidoki72 You have definitely got a deal there and made the right move. Wish we had been far bolder much earlier in life. We would be far better off had we taken more risk. It makes me question the FIRE movement. Then again, how much is enough? If we move up the ladder how long before you suddenly start wanting more. You can’t take it with you when you’re gone.

Very sensible @Scandala. We pulled in the reins in 1988/9. Looked at our family home in 1991 and couldn't quite afford it unless we streeeeetched too far. Bought it 15 months later in 1992 at the bottom when the developers had gone bankrupt and our little house was more saleable too. Over about 22 years the value increased 10 times although I had the back off and rebuilt it prior to selling in 2015. No house in the road has since sold for more (SW London).

Another update: a wreck in a perfect road has come up at a high but much lower price than anyone else on that road. Needs modernisation etc. Massive risk BUT even with the renovation costs of 400k or so, it will still be much less than others that are ‘done’ to a more habitable standard but not necessarily to our taste. Are we mad? Our mortgage would be about 600k at 3% interest only for now. May get same agent to sell our house…This time in spring they had 9 offers 15% over asking price.

Our first home was a large wreck we bought 12 years ago with a £600,000 mortgage, probably paying about the same interest rate as that (but we went and are still on interest only).

We are entering a period not dissimilar to 1990-1995. Falls in house prices with the bottom some 5 years away.

I had a loan of £1.3m at one point, interest only costing £90k a year and it worked out fine.
I wouldn't take on one to do up however as suggested above as it is too much work (never mind annoying the neighbours - as one on my road is annoying me day in day out - they have moved out for a year and the rest of us have to suffer their builders.....)

I don't think it sounds crazy at all. £1500 a month repayment on £1.3m is very affordable

What do you mean? An interest only mortgage is NOT repayment.

@radioactive4

Several houses on or near that road have come on for 800k more. Slightly better condition but still ropey.

Are you comfortable saying which leafy-not-Chelsea area you’re looking in @Scandala ? I’m also in one and think probably in the same price bracket as what you’re looking at. I’m seeing premium houses continue to sell quickly around here but the tricky ones (smaller gardens, just out of easy walking distance to transport etc., lots of work that isn’t priced in) are not selling now.

Hi @NewHouseNewMe we are south of the river. How about you? Are you looking as well?

Hi, I have a far lower budget and am in north london but also thinking of upsizing from a 2 bed flat to a 3 bed flat. are you waiting for prices to fall in order to upsize? My friends question my sanity at moving!

Hi @socialmedia23 . Are you looking in the same area as your two bed? Prices were out of control and I have always refused to get into bidding wars. The heat is off a bit so if I see a good opportunity, I will take it if it’s a place I can live in for five or ten years plus.
In your position I think I would wait to see what comes up with the view to holding out for a house.

Yes am looking in my area as well as a better area. like you i am foreign and so am ok with flats as long as it is big enough. Decent houses in my area are £1.4 million and while that probably doesn't seem much to you, it is a huge sum for me and i would rather have spare to pay for childcare.I don't really think the £1.4 million houses would completely crash as there are plenty of mortgage free people in their 30s I know (due to inheritance) and so they would be able to take out a similar mortgage to me and still be able to afford to pay. On the other hand, the flats are probably more sensitive to fluctuations esp flats that are not aimed at downsizers.

I would also need to help out MIL and SIL at some stage in the future so would rather not be over-committed (given cost of living crisis).

You’re right @socialmedia23 to think of it as a home first and investment second. And I do think £1.4m is a lot of money. I just happen to be old so bought when things were cheaper but even then a 350k mortgage seemed a lot!

The really silly money I was talking about in the original post is no longer viable due to the cost of credit. We currently have well paid jobs but no inheritance will be forthcoming on either side and like you we have relatives to help out.

Good luck with your potential move.