RateTart Forum

Depends what you call a 'risk'. Let's say you borrow £100,000 on "interest only" to pay back in 25 years. Your new home is worth, say, £110,000 at the time you buy. You set your stall out with an 'investment vehicle' to repay the full amount (£100,000) in 25 years. Then, after 1 year, the property market crashes and your house is worth, say, £90,000. If the market never recovers (and no-one anywhere has suggested THAT is likely), in 24 years you will still owe £100,000 when you repay your loan. Assuming your investment 'vehicle' that you were depending on to repay the loan (say, stock market investment, savings plan, weekly lottery ticket, cash in a pot under the bed) pays off, you repay the loan and that is it; you have paid £100,000 for a house that is now worth £90,000.

"Horrible", you say. BUT, you have lived there for 25 years, had a roof over your head for all that time, and it has cost you £10,000 or £400 a year or £1.10 a day in the lost value of the property. Against that, you will have put, say, £50,000 over the years into your investment 'vehicle' (shares, investment plan, whatever) or £100,000 into the pot under the bed, and used that to pay off the loan. You will have paid, say, 6% (£6,000 a year, £150,000 over 25 years) in interest each year to borrow the dosh up front. You will have also paid the money into the investment 'vehicle' to build a pot to repay the loan (depends on your luck and the specific investment 'vehicle', could be £10,000 or could be £100,000 going into the pot, that's where the real risk can lie).

So, overall, the property price crash risk should be seen in perspective. Fine tuning your interest rate has a MUCH bigger impact on your costs over the years than a likely property price dip. Anything that helps me get the lowest interest cost helps here enormously, since 5.5% interest over 25 years would come to £137,500, 5% would be £125,000 (thank you, theratetart!). Getting the best 'investment vehicle' plays a very important role, too, since building the cash pile to repay the loan has a tremendous impact on the overall economics (if it's savings accounts or shares or on-line trading that you are investing in, theratetart-type websites can be used there as well). Do the sums across the whole period and the whole cost/value, not just the property value component of it.

The more likely set of events (and no-one, expert or otherwise, knows what WILL happen, we all only speculate, otherwise some of us would win the lottery jackpot every week), is that house prices might dip in some future years, and go back up again in years after that. Share prices will probably go up and down over the years as well. If the last century has been any guide, at the end of 25 years, values of both property and shares will be considerably higher than they are today, so your overall 'risk' will be minimal. Probably. The real benefit of an 'interest only+investment vehicle' route for your mortgage is that you SPREAD the risk across more than just one type of investment, away from just housing property values. For your overall investment to be a bad deal, it would need both house prices AND whatever 'vehicle' you invest in to go south; and most 'experts' predict that is less likely than just one of them going down on their own.

Over the last 37 years, my wife and I have had both repayment and interest only mortgages, many of them. Interest only mortgages were easier to switch between lenders when we wanted a better interest rate deal, since the 'investment vehicle' bit was left alone, clicking up value in the background, and we just had the lender choice to optimise on as we went along. In the early years, ('69 to mid-90s) both property and 'investment vehicle' made money like bandits. In later years, property has been better than 'vehicle' (endowments, mainly shares-based). Overall, with 20-20 hindsight, I would have shaded the decision more towards repayment in the later years, but across the whole period (and that is how I would regard the judgement call you are having to make), the chances of either repayment or interest only having a massive hindsight advantage over the other are probably small. You pays your money, you makes your choice - your money is buying you a roof over your head either way, and if you have a little bit of good fortune, you might even make a few bob on the deal!

Hope this helps. Good luck!