Any point in not just taking out a large mortgage?
Discussion
A mate was telling me last night he bought his house for £400k about 4 years ago.he has just sold for £750k. In the meantime he has paid off much of the mortgage. He is now buying a £1.5mn house with about an £800-900k mortgage.
His logic is that it will be worth over £2mn in 3-5 years so where else can he earn that tax free?
Another mate bought a house for £1m and it's now near £1.6m a few years later.
These chaps are still fairly young, 30 or so so bought aged 26 ish.
They all have what would generally be regarded as good professional jobs in London.
But, none of them, even for a minute, a split second even, stop to think what would happen if rates increased or if property prices fall. They ALL just think 10% pa is normal.
Is it me that is wrong or has the government just made house prices the only show in town? What's the point in ISAs, pensions, shares, bonds etc nowadays? Why not just borrow big money, make £500k tax free and forget about share save schemes, ISAs, pensions and the like?
His logic is that it will be worth over £2mn in 3-5 years so where else can he earn that tax free?
Another mate bought a house for £1m and it's now near £1.6m a few years later.
These chaps are still fairly young, 30 or so so bought aged 26 ish.
They all have what would generally be regarded as good professional jobs in London.
But, none of them, even for a minute, a split second even, stop to think what would happen if rates increased or if property prices fall. They ALL just think 10% pa is normal.
Is it me that is wrong or has the government just made house prices the only show in town? What's the point in ISAs, pensions, shares, bonds etc nowadays? Why not just borrow big money, make £500k tax free and forget about share save schemes, ISAs, pensions and the like?
The increase in property prices is why people shun pensions, and invest in buy to lets.
Not sure you would get as much growth outside of London and South East. I live in Lancashire and I'd be surprised if prices have gone up by 10% over the last 5 years. However, property is much cheaper so you could buy 2-3 buy to lets for the same price as one in the South East.
How do your friends afford the mortgage payments and deposits?
Not sure you would get as much growth outside of London and South East. I live in Lancashire and I'd be surprised if prices have gone up by 10% over the last 5 years. However, property is much cheaper so you could buy 2-3 buy to lets for the same price as one in the South East.
How do your friends afford the mortgage payments and deposits?
jonah35 said:
They ALL just think 10% pa is normal.
Yep - the guys in our head-office in the SE are just the same. Being from The North I find it a bit scary - they seem to have a completely different mentality and really do live life on the financial edge.
Where I am, house prices are just about back to where they were 10 years ago.
All depends how much they earn and how easily they can cope with an interest rate rise.
It'll only take a small BoE base rate increase to make their interest payment leap 50% come the end of their fixed rate periods.
It's certainly a risk, "experts" seem divided on when we will see the rate increase though.
You're right about it being the only show in town for a decent return, the rush to BTL from people cashing in their pensions will be interesting.
I think ISAs are still attractive though, for a long term investment, as you can build a large lump of cash for tax free income when rates are higher.
It'll only take a small BoE base rate increase to make their interest payment leap 50% come the end of their fixed rate periods.
It's certainly a risk, "experts" seem divided on when we will see the rate increase though.
You're right about it being the only show in town for a decent return, the rush to BTL from people cashing in their pensions will be interesting.
I think ISAs are still attractive though, for a long term investment, as you can build a large lump of cash for tax free income when rates are higher.
hepy said:
The increase in property prices is why people shun pensions, and invest in buy to lets.
Not sure you would get as much growth outside of London and South East. I live in Lancashire and I'd be surprised if prices have gone up by 10% over the last 5 years. However, property is much cheaper so you could buy 2-3 buy to lets for the same price as one in the South East.
How do your friends afford the mortgage payments and deposits?
Some have help from parents but mostly they have just worked hard, have good jobs and so do their wives/girlfriends and they save up for the deposit and re the payments I presume they just pay them from income, no issues there.Not sure you would get as much growth outside of London and South East. I live in Lancashire and I'd be surprised if prices have gone up by 10% over the last 5 years. However, property is much cheaper so you could buy 2-3 buy to lets for the same price as one in the South East.
How do your friends afford the mortgage payments and deposits?
All this talk of multi asset investing, discretionary fund management and all the private banks that are wealth managers don't make that return.
It's all tax free too.
Sheepshanks said:
jonah35 said:
They ALL just think 10% pa is normal.
Yep - the guys in our head-office in the SE are just the same. Being from The North I find it a bit scary - they seem to have a completely different mentality and really do live life on the financial edge.
Where I am, house prices are just about back to where they were 10 years ago.
America is worse. A friend of mine has built a fantastic house in America, few million but it's so much bigger than a UK house. His and hers range rovers etc. ok, good incomes but the expenditure is so high it could go pop at any minute,
They're being proven right so far contrary to the crashists whilst living in a nice home/area.
ILoveMondeo said:
All depends how much they earn and how easily they can cope with an interest rate rise.
It'll only take a small BoE base rate increase to make their interest payment leap 50% come the end of their fixed rate periods.
It's certainly a risk, "experts" seem divided on when we will see the rate increase though.
You're right about it being the only show in town for a decent return, the rush to BTL from people cashing in their pensions will be interesting.
I think ISAs are still attractive though, for a long term investment, as you can build a large lump of cash for tax free income when rates are higher.
I don't know what they earn but I think the first couple I mentioned he gets perhaps £110 plus bonus and her maybe £100k so ok as far as a professional job goes but nothing extraordinary for lawyers/dentists etcIt'll only take a small BoE base rate increase to make their interest payment leap 50% come the end of their fixed rate periods.
It's certainly a risk, "experts" seem divided on when we will see the rate increase though.
You're right about it being the only show in town for a decent return, the rush to BTL from people cashing in their pensions will be interesting.
I think ISAs are still attractive though, for a long term investment, as you can build a large lump of cash for tax free income when rates are higher.
dont forget about inflation too in your calculations ...thats been over 30% since 2007
Outside of the SE bubble, the market seems to have barely broke even with inflation now, so in real terms over the last 7 years, youve made nothing, maybe a few percent at best. Houses are to be lived in of course so it makes no odds unless you are a speculator. Most people invest in BTL for income and any capital gains at the time of selling is down to market timing i.e. sell well house prices outperform inflation in a "boom" and buy when house prices are depressed when its "bust"
...it cant carry on forever, and when you are leveraged to the hilt, its easy to end up in a lot of debt that will take years to clear. I have Irish colleagues at work in negative equity for 8-9 years now, there are just as many losers out there as there are winners...
Outside of the SE bubble, the market seems to have barely broke even with inflation now, so in real terms over the last 7 years, youve made nothing, maybe a few percent at best. Houses are to be lived in of course so it makes no odds unless you are a speculator. Most people invest in BTL for income and any capital gains at the time of selling is down to market timing i.e. sell well house prices outperform inflation in a "boom" and buy when house prices are depressed when its "bust"
...it cant carry on forever, and when you are leveraged to the hilt, its easy to end up in a lot of debt that will take years to clear. I have Irish colleagues at work in negative equity for 8-9 years now, there are just as many losers out there as there are winners...
I was pretty conservative when buying my current house back in Feb '13 just before it all kicked off. Only borrowed about 60% of what the bank would have lended and I regret it now as the price increases are touching 40% where I live in South London. I'm naturally cautious and wince when people just assume that they SHOULD borrow 5x joint salary simply because they CAN.
My prediction for the next few years is prices settling where they are now and no-one getting their fingers burned; whichever party is incumbent post May 7th will follow the Tory model and fall over themselves to prop up prices. As someone looking to move up the ladder I'm hoping for a crash with 50% value wiped off and a return to sensible lending but just can't see it. There's no political appetite and far too many people will be affected.
Here's a question for the homeowners... Do you see continually increasing prices as a good thing? As far as I can see it only suits the banks, downsizers and people emigrating. How many people really downsize or emigrate?
My prediction for the next few years is prices settling where they are now and no-one getting their fingers burned; whichever party is incumbent post May 7th will follow the Tory model and fall over themselves to prop up prices. As someone looking to move up the ladder I'm hoping for a crash with 50% value wiped off and a return to sensible lending but just can't see it. There's no political appetite and far too many people will be affected.
Here's a question for the homeowners... Do you see continually increasing prices as a good thing? As far as I can see it only suits the banks, downsizers and people emigrating. How many people really downsize or emigrate?
CoolHands said:
not many couples earn 200k so I hardly think your examples are typical.
I think another very Southern thing is women earning good money - male colleagues are married to doctors, dentists, solicitors, head-teachers etc. The one married to the head-teacher complains about how little she gets paid.Sound logic provided the property value increases more than the interest payments you've sunk into it. Of course if you're not earning six figures and have other commitments then overpayments like that aren't possible and it's a bit of a zero-sum game.
I'd rather take a smaller mortgage and pay less back out of principle.
I'd rather take a smaller mortgage and pay less back out of principle.
jonah35 said:
I don't know what they earn but I think the first couple I mentioned he gets perhaps £110 plus bonus and her maybe £100k so ok as far as a professional job goes but nothing extraordinary for lawyers/dentists etc
Compared to the rest of the population that is definitely a very "extraordinary" salary, 100k+ puts them firmly in the top couple of percent of earners in the country! Two of them together earning even more so.They likely take home over £10k a month, plus bonuses.
So it's entirely normal for them to have a 1million plus house! Especially if they traded up once or twice to get there.
The same day it's "normal" for a couple on 50k a year to have traded up to a 300k house.
To have a 700k-800k loan on a house on that salary really isn't that much of a stretch, its well under 50% of their take home bearing in mind the other 50% is another 5 grand, more than enough for all the luxuries.
The point being, if they earn that much why wouldn't they get a really nice house. Sure the 500k place would do quite nicely and a lot of people may wish they could afford something like that, but they earn plenty of cash and it's not that much of a risk/stretch when they do so well for themselves. Quite simply a couple earning over 200k a year ca easily afford it.
CoolHands said:
not many couples earn 200k so I hardly think your examples are typical.
I think more do than you think.Just some examples off the top of my head:
Mate works in Dubai as a pilot, not particularly clever but I know he gets about £10k per month after tax. Not a big airline etc.
Another mate is a gas man/boiler fitter and he prob takes home £5k per month after tax so nearly £100kpa.
Solicitors if you just go to uni and do what you're told are on over £100k at 30
Dentists the same with private practice income
Oil and gas contractors
IT contractors etc
Anyway, that wasn't my point.
My point was that all these well educated people just do not even consider the possibility that property could ever fall or that rates could go up significantly, I genuinely mean this. They think it is a one way street.
To be fair,right to buy, help to buy, help to buy ISA, low rates, im beginning to think they're right!!
jonah35 said:
My point was that all these well educated people just do not even consider the possibility that property could ever fall or that rates could go up significantly, I genuinely mean this. They think it is a one way street.
I suppose if we do get a crash to such an extent that the people you're talking about are in trouble, then all bets are off anyway.
groundcontrol said:
Sound logic provided the property value increases more than the interest payments you've sunk into it. Of course if you're not earning six figures and have other commitments then overpayments like that aren't possible and it's a bit of a zero-sum game.
I'd rather take a smaller mortgage and pay less back out of principle.
If you can borrow below inflation then its madness not to.I'd rather take a smaller mortgage and pay less back out of principle.
I am by nature quite risk adverse, I bought a london flat fiver years ago and until around 18 months ago was chipping away at paying it off, I suddenly realised I was doing it wrong, if you can borrow at comfortable leverage levels and at 40-50% equity level mortgages at rates below inflation, then its madness not to, if only by the fact others will and hard asset prices are driven up. So i took 50% out of the flat, rented it out and bought a house with some added savings to make a 40% deposit.
Its great to prudent, but its impossible to fight the system, you need to make use of the tools available; at the moment its cheap money. The difficulty is making sure you are well placed for upcoming changes.
Edited by gibbon on Sunday 26th April 16:47
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