Endowment style property purchase
Discussion
I think I remember there was one poster here (nowwatchthisdrive perhaps) that was doing something like this, but keen to get an idea of whether anyone else is.
I'm debating buying another house, that will cost more than the one I am in. The nature or our household earnings are very sporadic owing to variable compensation, so there is an appeal to buy somewhere interest only to have a low payment month to month with the option to pay down as and when suits, not all that uncommon I suspect among those who are able to get approved for such a product.
However, I'm trying to work out whether barely paying down the debt (assuming one can secure a half decent IO rate and they continue vaguely in that way) and instead investing into the markets (given this is likely a 15 year view or so) is going to yield a stronger result, anyone doing it this way? I appreciate it is basically the endowment structure which didn't work so well before. I've done some fag packet workings taking into account pension/GIA/ISA and it seems to stack up, but likely missing some obvious stuff. Also would be happy to flog the place anyway at that point to pay it down, so don't actually need to pay it off in full as wouldn't want a house of that value at retirement.
I'm debating buying another house, that will cost more than the one I am in. The nature or our household earnings are very sporadic owing to variable compensation, so there is an appeal to buy somewhere interest only to have a low payment month to month with the option to pay down as and when suits, not all that uncommon I suspect among those who are able to get approved for such a product.
However, I'm trying to work out whether barely paying down the debt (assuming one can secure a half decent IO rate and they continue vaguely in that way) and instead investing into the markets (given this is likely a 15 year view or so) is going to yield a stronger result, anyone doing it this way? I appreciate it is basically the endowment structure which didn't work so well before. I've done some fag packet workings taking into account pension/GIA/ISA and it seems to stack up, but likely missing some obvious stuff. Also would be happy to flog the place anyway at that point to pay it down, so don't actually need to pay it off in full as wouldn't want a house of that value at retirement.
Unexpected Item In The Bagging Area said:
I’m sure you’re aware of PH’s tame mortgage advisor Sarnie but have you spoken to him about this?
I’ve spoken to advisors. It isn’t really the same as speaking to someone who is actually doing it with their own property. The bank by all accounts doesn’t seem to be to fussed on how you pay it back from what I hear (assuming you meet their requirements, which admittedly, few will) as long as you say you will flog the place if needs be. Unexpected Item In The Bagging Area said:
I’m sure you’re aware of PH’s tame mortgage advisor Sarnie but have you spoken to him about this?
Thank you!Most of our HNW clients are on interest only, usually due to being paid a basic and then lumpy bonus' periodically.
To get an IO mortgage you need to consider and be able to satisfy 4 main points;
- Income: Most will expect you to earn over £75k
- Equity: Most will wants at least £250k equity in the property
- LTV: Max of 85%, 75% is the norm, expect to be limited to 50% on IO and the rest on repayment, depending on how you propose to repay the loan
- Repayment vehicle: the most common is "sale of the property" which keeps things simple. Some lenders won't accept that so you'd need a legitimate, verifiable way of repaying the loan Eg cash savings, investments, pension lump sum draw down etc etc
Hope that helps!
We did something similar ( but much simpler ) 20 years ago when we upgraded to what my wife said was her dream house - 100 metres away from where we lived.
Purchase price was x2 sale price and within those parameters that Sarnie has said - major difference being based on my salary at that time the basic was used x5 for interest only and the mortgage split into 2 with 80% being 2% off their variable rate and the balance being at variable.
I had agreed in writing at the time of application that I would use 50% of my nett bonus’s ( not guaranteed but “ likely “ for the next 3 years ) to reduce the capital sum.
In the end this was exactly what happened and then a further 2 years saw the mortgage fully redeemed.
Not working now but we still love living here.
My point is simply that if I had borrowed those sums I would not have been brave enough to use potential investments made to pay off the mortgage whether the lender would have accepted that anyway.
You sound braver than me so my only other advice would be don’t have regrets.
If you can afford it or have the potential investment strategy or as you say simply can sell the house then go for it !
Purchase price was x2 sale price and within those parameters that Sarnie has said - major difference being based on my salary at that time the basic was used x5 for interest only and the mortgage split into 2 with 80% being 2% off their variable rate and the balance being at variable.
I had agreed in writing at the time of application that I would use 50% of my nett bonus’s ( not guaranteed but “ likely “ for the next 3 years ) to reduce the capital sum.
In the end this was exactly what happened and then a further 2 years saw the mortgage fully redeemed.
Not working now but we still love living here.
My point is simply that if I had borrowed those sums I would not have been brave enough to use potential investments made to pay off the mortgage whether the lender would have accepted that anyway.
You sound braver than me so my only other advice would be don’t have regrets.
If you can afford it or have the potential investment strategy or as you say simply can sell the house then go for it !
Interesting, I guess my issue is that presently money I can get my hands on is a bit over 50% of the amount I'd look to borrow, vs yourself where it sounds as if you have funds far in excess of the property values. Perhaps I've got the wrong end of the stick.
My slight hesitation is that it relies on the market performing vaguely as it has done in the past which is always a gamble. That said, I think likely we would look to use a circa 20 year window which brings us both about to the age where we can get our hands on every bit of money in our names, so that feels like a long enough time period to hopefully ride out the ups and downs.
I've just modelled out our various investment pots (ISA/GIA/Pensions) and assuming things carry on as we are now in terms of contributions/market performs a bit below long term average we should have between 3-4x coverage of the loan by that point. I suppose one thing in mind is at what sort of rate does one stop investing and start paying down the debt instead..
Food for thought, and of course the above doesn't really factor in wage growth which could in a decade make what looks like a lot of money today, look much less so in a decade.
My slight hesitation is that it relies on the market performing vaguely as it has done in the past which is always a gamble. That said, I think likely we would look to use a circa 20 year window which brings us both about to the age where we can get our hands on every bit of money in our names, so that feels like a long enough time period to hopefully ride out the ups and downs.
I've just modelled out our various investment pots (ISA/GIA/Pensions) and assuming things carry on as we are now in terms of contributions/market performs a bit below long term average we should have between 3-4x coverage of the loan by that point. I suppose one thing in mind is at what sort of rate does one stop investing and start paying down the debt instead..
Food for thought, and of course the above doesn't really factor in wage growth which could in a decade make what looks like a lot of money today, look much less so in a decade.
I see James Shack has done a post I guess essentially asking the same question here - https://youtu.be/1kF1JGSLd3w?si=nzd-l4BQCRai7e02
Quite interesting, my projection is for 2x borrowing value at redemption (more if I push out to 70-75 as per his advice) and not brining pensions into the equation (as we get tapered out some years so it isn’t reliable).
Looks like the TLDR was if you have nerve, include some bonds, and don’t make a habit of getting fired then almost always it should make financial sense to go IO and invest the rest. And with my eventual plan to leave London anyway I don’t even need to have the full amount at the end of the term because as mentioned above, deposit plus even modest growth in house price would leave me with plenty upon sale to buy something else after having settled the loan.
Am I missing any other obvious downsides? Why don’t more people do this, or am I being naive and they do?
Quite interesting, my projection is for 2x borrowing value at redemption (more if I push out to 70-75 as per his advice) and not brining pensions into the equation (as we get tapered out some years so it isn’t reliable).
Looks like the TLDR was if you have nerve, include some bonds, and don’t make a habit of getting fired then almost always it should make financial sense to go IO and invest the rest. And with my eventual plan to leave London anyway I don’t even need to have the full amount at the end of the term because as mentioned above, deposit plus even modest growth in house price would leave me with plenty upon sale to buy something else after having settled the loan.
Am I missing any other obvious downsides? Why don’t more people do this, or am I being naive and they do?
okgo said:
Am I missing any other obvious downsides? Why don’t more people do this, or am I being naive and they do?
I think the number 1 obstacle to this approach is discipline. Most don;t have it & so the skimp on setting aside the money in investment vehicles. The other issues are do you need the ISA’s for other things, eg: retirement Ultimately you need to look at how you use the various tax shelters & your overall financial plans
I think you’re right in that. Luckily discipline is something I have when it comes to cash. Wish it extended to other things in life but hey ho.
It’s difficult to forecast to any real degree of accuracy and as per his video, if you had to cash in your chips in a crisis it wouldn’t be pretty. So I do think taking a long term view makes some sense as it relieves that pressure somewhat.
It’s difficult to forecast to any real degree of accuracy and as per his video, if you had to cash in your chips in a crisis it wouldn’t be pretty. So I do think taking a long term view makes some sense as it relieves that pressure somewhat.
okgo said:
Looks like the TLDR was if you have nerve, include some bonds, and don’t make a habit of getting fired then almost always it should make financial sense to go IO and invest the rest. And with my eventual plan to leave London anyway I don’t even need to have the full amount at the end of the term because as mentioned above, deposit plus even modest growth in house price would leave me with plenty upon sale to buy something else after having settled the loan.
Am I missing any other obvious downsides? Why don’t more people do this, or am I being naive and they do?
It can go spectacularly wrong when companies, of the sort that pay lumpy bonuses, have made sudden and widespread layoffs or gone pop. Too much leverage and no way to service the exposure. In some cases those with the exposure might not have seen becoming jobless as something that was likely to happen to them. Am I missing any other obvious downsides? Why don’t more people do this, or am I being naive and they do?
There are several firms in London that no longer allow access to their roof terraces and/or changed how accessible their atriums were at height. (May not all be as a result of debt, but it’s the sort of thing that can get on top of people)
Glosphil said:
Endowment policy based mortgages certainly worked well in the past. I took out £7k & £9k policies in the mid-'70s & early-80s & they paid out a total of over £36k.
I was going to say same - the one we started in 1979 had tax free premiums, it was only about the same cost as the included life insurance would have cost on its own. We were paying £20/mth and got £5K on surrender when we moved in 86. We took another one, this time it was specifically a ‘low cost endowment’ and ran that to its end. OK, we probably didn’t appreciate it at the time, but by the end we were messing about with pretty small amounts of money so underperformance wouldn’t have been an issue.I suppose the snag with doing it on a huge mortgage today is the margin (in £) for error is also huge. And you’re always working against the fact that the outstanding balance isn’t being reduced so interest paid never reduces - other than with interest rate changes, which of course could go horribly against you.
I'm doing something similar - have an IO mortgage (arranged via Sarnie) but intend to plough my earnings/savings into a far higher (in paper) co-investment structure tied to my employment.
Time will tell what happens but this structure has generated a ~40% pa average return which is better than the mortgage at ~5.7%, even after paying away 45% of it.
Time will tell what happens but this structure has generated a ~40% pa average return which is better than the mortgage at ~5.7%, even after paying away 45% of it.
I mean, you could reduce it I guess. I know of folk on IO who take a lump off it every year with bonus payment (note finance related work) but I think they want to actually pay off the place at the end to own it, whereas I’d probably flog it anyway.
Looneytunes makes good sense, our income slightly less precarious in that it’s split evenly and we have a head start on the repayment vehicle but certainly a layer of stress I suppose. But knowing you could always sell and buy something almost anywhere (albeit more modest if in London) cash does at least offer a lifeline of sorts.
Looneytunes makes good sense, our income slightly less precarious in that it’s split evenly and we have a head start on the repayment vehicle but certainly a layer of stress I suppose. But knowing you could always sell and buy something almost anywhere (albeit more modest if in London) cash does at least offer a lifeline of sorts.
I think it is a pretty close call OP as to what is better. Very much depends on rental yield, capital appreciation and obviously LTV which is obviously not something we know. You also have frictional costs…stamp duty on a second home purchase of £600k is about 5%, £1mil 7%. Interest Only loans on Buy to Let’s are also not a massively competitive market these days (I have an owned a flat for 20 years that’s been on IO Buy to Let).
I think after costs and the drag on your investment of losing circa 5% upfront it is very much about the capital appreciation element.
The flat I have owned for twenty years was a good investment for the first 10 years because of capital appreciation but it’s not been great for the last ten years. There’s a decent CGT bill to pay on it if i do sell….I would probably sell it otherwise.
I think after costs and the drag on your investment of losing circa 5% upfront it is very much about the capital appreciation element.
The flat I have owned for twenty years was a good investment for the first 10 years because of capital appreciation but it’s not been great for the last ten years. There’s a decent CGT bill to pay on it if i do sell….I would probably sell it otherwise.
Cheib said:
I think it is a pretty close call OP as to what is better. Very much depends on rental yield, capital appreciation and obviously LTV which is obviously not something we know. You also have frictional costs…stamp duty on a second home purchase of £600k is about 5%, £1mil 7%. Interest Only loans on Buy to Let’s are also not a massively competitive market these days (I have an owned a flat for 20 years that’s been on IO Buy to Let).
I think after costs and the drag on your investment of losing circa 5% upfront it is very much about the capital appreciation element.
The flat I have owned for twenty years was a good investment for the first 10 years because of capital appreciation but it’s not been great for the last ten years. There’s a decent CGT bill to pay on it if i do sell….I would probably sell it otherwise.
This is for primary residence I think after costs and the drag on your investment of losing circa 5% upfront it is very much about the capital appreciation element.
The flat I have owned for twenty years was a good investment for the first 10 years because of capital appreciation but it’s not been great for the last ten years. There’s a decent CGT bill to pay on it if i do sell….I would probably sell it otherwise.
kiethton said:
I'm doing something similar - have an IO mortgage (arranged via Sarnie) but intend to plough my earnings/savings into a far higher (in paper) co-investment structure tied to my employment.
Time will tell what happens but this structure has generated a ~40% pa average return which is better than the mortgage at ~5.7%, even after paying away 45% of it.
Interesting, we have ESPP type schemes but there is a cap of $25k per year so makes it all fairly pointless sadly. Time will tell what happens but this structure has generated a ~40% pa average return which is better than the mortgage at ~5.7%, even after paying away 45% of it.
okgo said:
I mean, you could reduce it I guess. I know of folk on IO who take a lump off it every year with bonus payment (note finance related work) but I think they want to actually pay off the place at the end to own it, whereas I’d probably flog it anyway.
I don't know details, but my boss is doing that - living in a big place with an IO mortgage that he intends to sell when the kids leave home. Last kid is at Uni now.I believe he went in pretty deep quite a few years ago and has £500K I/O . A few mths ago he was suggesting the house is worth £1.2M but he did have a wobbly few years as it's close (but not close enough) to HS2.
His parents are properly loaded though - I assume if it all went pear-shaped he has a safety-net there but he has said they've not been sensible at spreading the dosh around as they get older. I did know a couple of other Southern colleages who were on IO and relying on inheritence - I know it didn't work out for one of them and lost touch with the the other.
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