Is there a danger of over saving into a LISA?

Imagine you have got £10,000 of your own money saved up into the LISA products. That's £12500 total sitting in the products including £2500 of bonus.

If instead you had saved another £5000 into the LISAs for £15,000 of your own money saved up, you would have £18750 sitting in the products including £3750 of bonus. All of which can be given to the seller to help pay for the house, leaving you needing a smaller mortgage.

If you are buying a property, whether it costs £100k or £200k or £300k or £400k, it is clearly better to have £3750 of free government money towards it than have only £2500 of free government money towards it.

So if you were buying the house for £100k, with an £18750 chunk of the purchase price being paid from your help to buy, you would need an £81,250 mortgage to pay for the rest.

If instead you were buying the house for £100k, with a £12500 chunk of the purchase price being paid from your help to buy, you would need a £87,500 mortgage to cover the rest.

Sure, maybe the bank is willing to lend you £87500 so to buy the £100k house you don't NEED to put as much in yourself (between you and the government) if you don't want to.

But, in that example you did £5000 more of savings but got £1250 extra from the government so you have the option of only needing to borrow £81250 instead of £87500, while only paying £5000 more cash yourself. If you hadn't used the LISA for the last £5000 of your savings, you would entirely miss out on the £1250 extra money the government was willing to give you for the purchase.

Clearly, you don't want to put every single penny into a LISA account and then spend it on buying the house so you have literally no money left for home maintenance, improvements, living costs, emergencies etc. But every £100 you *don't* put into a LISA, up to the annual limits, is £25 that the government would have been willing to give you for free to help pay off a chunk of mortgage overnight (i.e., you just end up taking a lower mortgage).

As a pleasant side effect, the lower mortgage would get you a better loan-to-value, so might get you a lower interest rate on the whole borrowing, if you're lucky. Though that depends on how close you were to the major loan-to-value thresholds like 90%, 85%, 75% etc etc, and some people won't trigger a better rate by having a lower mortgage; the only benefit is having the lower mortgage, with less mortgage to pay off over the next 25 years or whatever. Still a good thing.

So when you are sitting there a few weeks before completion, if you have not maxed out your LISA limit for the year, make sure you think long and hard about whether you would rather have another £100 in your bank account for carpets and curtains... or whether you will temporarily accept worse carpets and curtains and stick the £100 into the LISA to get a £25 bonus which then gets paid over to the seller with your £100 to allow you to take a £125 lower mortgage debt.

£100 paid via LISA to avoid £125 of mortgage debt, and sticking £100 of your bill for home furnishings on a credit card that you pay off next month once you've saved another £100... is better than spending the £100 on home furnishings now and then saving another £100 which you use to pay £100 off the mortgage next month. You get to the same place in your bank account but one of them leaves you with a £25 higher mortgage because you didn't take the free government money. I am a fan of taking free money.

I don't qualify for the free money being over 40 and having a property, so I am somewhat jealous that you have this choice to make.

Basically, try to put as much as you can realistically afford towards reducing the size of your mortgage via having a bigger LISA and getting free money to help you. Just because the bank will give you £87k or whatever doesn't mean you should borrow it all from them... and not put in more of your own cash, get more free government bonus, and borrow less! Sure, don't completely wipe yourself out so you're sitting there with a lower mortgage but living on scraps and have no spare money to pay the mortgage direct debit in a few months time when you lose your job, so you lose the house. Life is about balance.

Alexland wrote: »

How about saving so long into LISAs that it forces you to buy a bigger house? I reckon its a scam so the government can get you onto a higher council tax band ;-)

It's certainly a strategic plan by the government to support higher house prices and maintain existing 'housing wealth' for everybody, by letting people who can't afford high prices get free taxpayers money to help them afford the high prices, rather than let the market take its course and have house prices fall to some natural lower level at which young FTBs are able to buy the house.

So in that sense it is a scam to have you having a higher valued property. It is also a bit of protectionism because some wealthy nonresident foreign or BTL investor can't get the free money, so would have to put in £200k to buy a house with his own money and mortgage, where a local young investor with £4k contributed to a LISA can buy the same house for £199k of his money and £1k of UK taxpayer's money.

In this situation the fact that the local young investor could only afford £199k without the handout wouldn't let the property price naturally fall to £199k in the absence of the scheme because if it fell to £199.5k the nonresident guy waiting on the sidelines would snap it up in a jiffy.

So, the government is not solving the 'high house price' problem but they are giving the young UK FTBs a comparative advantage to acquire the housing stock ; so that all things being equal you do get some shift to home owner-occupiership by UK residents rather than empty-second-home ownership by foreigners or BTL rental stock.

Really the solution is to build a sh1tload more residential properties so the supply expands to meet the demand at lower prices, but that wouldn't preserve the 'housing wealth' which helps people feel confident of going out and spending more money on goods and services, generates a bit more inheritance tax etc.