Interest only - are we mad?

Mel1986

If it was my dream house? I'd go for it tbh.
You're not in an awful position. You'd have a £200k mortgage which would have to be interest only for the first few years. Obviously the only way you could do it would be to sell your gfs house..so sell that in 2014, plough the £125k into your £200k mortgage and you are left with a manageable £75k to restructure to a repayment mortgage.

It all goes boobies-up then you have your gf's nearly-mortgage-free house as a fallback anyway. Nothing ventured, nothing gained

Thrugelmir

jamesd wrote: »

Starting off with a repayment mortgage it's about £265 a month in initial capital repayment at the start of a 25 year term. The £265 would get you £330 after basic rate pension tax relief and at 7% growth (ignoring inflation) gets you to £258,000 of the target. That's £64,500 off the mortgage with the lump sum and £7,700 or so of pension income (at 4%).

I investigated the possibilty myself many years ago. Even now growth rate of 7% after costs is pretty challenging. You only have to look at the effect of 1% to 1.5% annual management charges to see the effect on performance. The only guaranteed winners are the fund managers themselves.

Achieving £258k is some way short of £600k. Neither have you factored in the additional interest charges incurred by remaining on an interest mortgage only.

jamesd

For twenty year periods from 1977 to 2003 the UK main market historically returned a mean return of 10.7% plus inflation on single lump sum investments so I don't think that 7% without inflation is a hard target for someone using a range of investments both inside and outside the UK.

I assumed that the interest would be paid throughout the life of the mortgage by using only the capital payment of the first month. A pension mortgage is about getting both pension income and mortgage and does require paying in more than just the mortgage payment. An ISA mortgage doesn't, but you don't get as good a tax deal on the ISA.

If you did want to use an ISA, the final value with a £265 a month payment and 7% return would be £207,000. But that doesn't get you any pension income. It takes just 4.8% to cover the £150,000 mortgage value. That's well below the mean return for all twenty year periods from 1899 through 2003, which was 5.5% plus inflation.

Still, getting less than past mean returns can happen and anyone doing this would need to be willing and able to deal with it if it did.

Nick2000

Thanks to everyone who replied, you're amazing to take the time.
We are veering towards the 'you are mad' camp so will probably stay put - or find somewhere cheaper that we can do up and turn into a dream home