So thinking of buying a house and theres seems to be two approaches here.

1. Borrow as much as possible to buy the most expensive house possible on interest only mortgage. Theory being houses increase in price long term and mortgages are cheap debt. My dad seems to favour this approach.

2. Borrow less and aim to pay off the mortgage as quickly as possible

so in say, 25 years could own a cheaper house outright, or be sitting on the capital gains of a more expensive house that could be sold to pay off the debt.

whats best? (assuming for simplicity i could afford mortgage payments in both cases!!).

As easily answerable as "Is HT or FS best?".

whatever you can afford and still live now

Personally I'd follow the latter. You can't guarantee house prices, so go with the one you can pay off as quick as possible so you at least own a roof over your head.

Problem with 1) is that unless you've got some way to pay off the loan, you never actually wind up with a house at the end of it, just the notional profit despite the fact that you've been paying a loan for all that time (if you run to completion).

You could split it between interest-only and repayment tho' – a mate's done that with his place, couldn't afford to do the whole thing with repayment so has split it 50-50.

You'd be a crazy nut to deliberately buy on an interest only mortgage. No sensible bank will lend you that surely, unless you have some kind of parallel investment that you claim will pay it off in 25 years (which ends up the same as a repayment mortgage, except you have to gamble on how well your investment works).

Buying interest only is just renting the house from the bank and gambling on house prices going up enough to make it worth while.

Assuming you're paying roughly the same in each case, they'd have to go up by enough to make the cost of the whole house (that you pay off), be as much as the rise in price of the more expensive house. Which isn't guaranteed for sure – only works if interest rates stay dead low, you get a good rate, house prices go way way up etc etc.

Joe

Well I'm a bit more financially aware than most(!) and decided to buy I house a few months after starting work and take the risk of borrowing as much as I could (4x income) and traded up a few times as needed to go to new areas. I offset the risk with a lodger but stopped that when I got married. This worked out well for me as my salary improved nicely and as I bought in '96 house prices have gone up a lot. I now have a nice house and small debt so worked for me.

BTW, I went for interest only and built up investments as appropriate but then ended up with an offset mortgage and just dumped money into that so was like a super repayment mortgage in the end.

If you buy a cheaper house and pay it off early, you will have loads more disposable income rather than the possibility of a more valuable piece of real estate in the future.

Also remember big houses dont just have big mortgage payments, they cost more to heat, insure and in council tax.

I'd say b, you must be made to have an interest only mortgage. Do what you can afford without having no life. Lots of my friends whinge and moan that me and Mr MC go on 2 holidays a year, but we have a small 2 bed end of terrace and they own 4 bed barn conversions on interest only mortgages where they also rely on getting promotion to pay the mortgage.

Both? We are currently paying off the interest on our current mortgage, looking to move to a bigger place with baby on the way, considering interest only whilst we are on a reduced income for a few years, then back to a normal repayment one. (proviso being we can afford the repayment one if we were both working, both teachers so employment and wages fairly predictable for us).

You can't guarantee house prices

Au contraire, Rodney.
As far as things go, you can pretty much guarantee long run growth in house prices… 😉

real house price index for 50 years:
A pretty good bet in the longer term unless we get some kind of communist government that expropriates assets from the comrades etc etc…

http://www.whatprice.co.uk/financial/housing-market/house-prices.html

unless you live in Chicago or you expect the 6+bn population of the world to halve anytime soon…

http://www.nbcchicago.com/news/local-beat/Dollar-Homes-Lack-Buyers-67566177.html

Depends what you want to do in retirement.

If you buy an expensive house and the prices go up, yes, you've made a profit.

A profit that will then be spent renting a property in your old age as you've never actually 'bought' a house, just like some say above, rented it off the bank.

If prices do go up then your 'profit' might not be enough to buy you that little retirement bungalow because their prices have gone through the roof too.

Not sure we're going to see house prices double in 5 years like we say a while ago. Probably settle down to a little, say, 5% rise a year so it might take you a long time even to cover the throwaway stamp duty fees/solicitors costs.

Go for the middle ground, maybe the best house you could afford on repayment.

In some ways I'd say 1 – buy the most expensive. Firstly because you get to enjoy having a bigger/better house…can be good for general wellbeing (as long as you can pay for it). The second is that if its a bigger house now, as and when you marry and have a family (you don't say this in OP), it may still be suitable for that purpose so it will save you the cost and hassle of moving.

The biggest issue problem in my mind is whether you'll definitely want to keep the same house forever and presume you won't want to move again

Just max out your credit cards, there's a flat around the corner from me on the go for 25 grand.

Interest only for buy to let repayment for the roof over your own head.

Don't go for the interest only option, it leaves you no fallback plan if things get difficult!

I bought my first house three years ago, now wondering if I should have spent a little more as we are ready to move to a bigger place, but the moving costs are prohibitive. So if you are treating your first purchase as a step on the ladder rather than a house for the forseeable future, I would consider spending as much as you can reasonably afford, but within a 30 year repayment mortgage. We went for a 40 year mortgage simply so that we could overpay to match a 30yr timescale, and then if things got tight we could drop back to the statutory amount, and if we were really struggling, we could borrow back the overpayments.

The overpayments are now a (small) contribution towards the moving costs if needed.

Assumptions;

£850 per month mortgage

25 years

4.5% interest rate

Interest only you could borrow £228,000 on a house
Repayment you could borrow £150,000 on a house

Assuming 8.5% growth (average over previous 15 years),

The interest only house is now worth £1.75million, the repayment/25year is worth £1.15million. Assuming the repayment house was still adequate for your needs in 25 years you'd own assets worth the full ammount. The interest only house would have to either be bought off the bank or sold. for comparison, assuming 2.5% inflation it would cost £123,000 to buy it back in todays money in 25 years time, otherwise you would have to move out and buy a slightly smaller house.

This all assumes the future mimics the past, which it wont, otherwise the average wage will be £35k in 25 years time, and the average house will be £1.3million.

Something will have to give, either the population needs contorling or housing stock needs massively increacing.

As far as things go, you can pretty much guarantee long run growth in house prices…

real house price index for 50 years:
A pretty good bet in the longer term unless we get some kind of communist government that expropriates assets from the comrades etc etc…

Although that isn't true everywhere – e.g. Japan hasn't had it so well (if you'd done this any time in the last 30 years or so, you'd be way worse off by buying the interest only).

And the amount you need prices to go up for plan 1) to make sense is a very large amount – unless you bought at bang on the bottom last time prices went down (1995 or something), I'd be surprised if you'd be better off, bearing in mind that at the end of that cunning plan you need to sell and buy the smaller house anyway and that will also be more expensive.

Joe

Is it OK to safely assume rates will stay low for 25 years, and never get anywhere near 16% again?

Yes, so long as rates haven't hit 16% in living memory!

Yea, and with the choice of a conservative government or a hung parliment for the next 4 years, expect interest rates and inflation in double figures and static house prices (IMO)

Assuming 8.5% growth (average over previous 15 years),

That's possibly a pretty dodgy point to take your averages from, as 1995 was bang at the bottom of the last recession and current prices look like still being at the high end. Isn't the long term trend more like 3-4% if you go many more years back?

Joe

ABOUT WHAT YOUR DAD SAID

Sorry for shouting
My post will prob get lost in the middle of this

Your dad is telling you to max out

This is probably cos he bought a house in the 70's (Im guessing) when inflation was stupidly out of control

Basically everything was going up including wages
So if you maxed out on a house you could bank on your wages going up a lot over the next few years making the pain easier

Ask him

Good luck

Oh and FS or HT 🙂

Your Dad is looking backwards, you need to look forwards.

When I bought my first few properties, moving was resonably cheap (and property was rising in value – although it did stop for 5-7 years after 1989) with no or little stamp duty and no mortgage fees. Now its different.

Interest rates are 0.5%, but mortgage rates at plus 3% – so if interest rates slowly move up to 5%, that will put mortgage rates at nearly 8% – more than doubling your payments.

Interest only is useful when you need a break, e.g unemployment, first child – and depending on how young you are no problem for a few years.

I wouldn't be worried about paying off your mortgage early, as long as you've a plan to actually pay it off.

Don't buy too small, and don't buy something you can't afford to keep.

When we came back from working abroad we (2 adults + 1 child) decided that we need a house for the next 10 plus years that could be afforded on one wage, while still having a life. So we bought a nearly new 3 bed deteched. We still live there. And yes at the time we would have easily got a mortgage for a 4 bed, and there have been times in the past 10 years when our mortgage was less than one multiple of salary.

We still live here, and TBH I can't see us moving – well not for a while anyway as we have a 0.3% above base-rate tracker 😆

Pretty sure mine got to about 15.something% in 1989/90

Scared me to death that did, to the point were a mortgage needs to be about a day or 2 days pay for me to feel comfortable.
I'll never forget the four new builds at the back of us that sold for 99K with 100% mortgages and were worth 35K later that year with interest rates in double figures.

This is probably cos he bought a house in the 70's (Im guessing) when inflation was stupidly out of control

And in those days you could claim tax relief on your mortgage interest so you were stupid not to mortgage to the max. Things are very different now and no-one knows what will happen in the future – you might want to think about worst case scenarios and see how your plan could cope. A bit like the FSA stress tests on the banks where they had to model a 50% drop in house prices and see if they could cope…

Interest rates are 0.5%, but mortgage rates at plus 3% – so if interest rates slowly move up to 5%, that will put mortgage rates at nearly 8% – more than doubling your payments.

Nah – bank lending rates are where they should be it's the base rate that's artificially low. As the base rate rises the gap between that and the lending rate will decrease.

2

Because 1 leads into a cycle of buy big house you can't afford, work harder than you'd like, fit new kitchen, buy bigger house, work harder than you'd like, fit new kitchen, buy bigger house etc.

Until you get to retirement, at which time you end up with a sodding enormous house that's bigger than you ever needed and no happy memories.

Of course that's all assuming the economy and life goes on much as it has for the last 20-30 years, which it won't. So 2 also has the advantage of keeping you in a house you'll be able to afford to heat in 10 years.

I suspect the right answer is "somewhere in the middle".

For my part, I bought at around the maximum I could borrow (4.5x my salary), and still be able to make repayments. Made sense to me as I knew I was fairly underpaid at the time, and had plans to rectify this.

Oh, and whilst larger houses are going to appreciate more, and are generally more comfortable to live in, it's worthwhile considering if the additional payments are going to negatively impact your lifestyle in other ways.

Stonor – how do you think demographics will influence growth, surely one of the biggest factors in past house price growth has been the ageing of the "baby boomer" generation? If you look at the future strain on the economy from pensions, increasing nhs costs etc from an ageing population something needs to give to pay for it and asset price deflation or stagnation is one possible consequence. Obviously I don't pretend to know the answers but I just wonder whether you have factored this into your analysis.

3. Buy the best thing you can afford on a repayment mortgage, making sure you have the option to overpay with negligible penalties.

Then if your income rises, you can whittle down the principal sum.

Its sort of as if the last 2 years never happened!

How many people are in negitive equity or under the threat of repossession due to their desire for the biggest house possible and the most arcane way of financing it?

There are other ways to save for your retirement than sticking a load of money into a house and if you have a small mortgage you can choose which one is best. If things go pear shaped again (deffo on the cards with Osbourne) then a small mortgage gives a large margin of safety. A small mortgage also give the opportunity to get away more, spend more on beer etc.

All the points about advice based on experience of the 70's are right. Borrowing quickly looses value with inflation so it made sence at the time to go big and there was tax relief etc. Its no longer relevant.

mefty: it's household numbers that matter most, rather than age of population. population is still going up buy average household size is falling continuing to put pressure on number of households and will do for at least the next 15 years IMO unless we start a significant phase of net emmigration.

2), with an overpayment option, to reduce the term you are paying the mortgage off – you'll save money long term by doing that.

Who dares wins I say…!

If things go pear shaped again (deffo on the cards with Osbourne)

I think there is likely to be trouble ahead but not sure why you imply only if with a change of government.

Friends bought a two bedroom flat in central London for 120k in 1998 interest only. Australians, said they weren't going to bother with a savings vehicle for it, they were going to sell it when they went back home. Oh how we laughed at their foolishness. For the first year, anyway.

That is true to an extent but there have been problems with government household statistics in the past as they did not factor in that some single people live together, I don't know to what extent these errors have been corrected, you may well do.

I just wonder whether we should look to Japan's experience post 1991 as a guide to what can happen to an economy that has suffered a severe asset bubble.

Japan may be an indication of our model to come…, but even though sterling was overvalued, I dont think it was as overvalued as the Yen prior to 91.

I agree I think their asset over-valuation and that of their currency was much larger, but their past is a possible future scenario for our economy as they had similar issues. There seem to be very few who recognise this.