Lifetime ISA with interest only mortage

onthefence12

Hi,

I am wondering if it makes much sense to try and go for an interest only mortgage and pay what I would have spent on repayment into a Lifetime ISA when they start?

Thanks for your help.

masonic

Let's say you are 35 and you take out an interest only mortgage with a rate that averages out at 6% over a 25 year term.

The average interest charge would be 6% annualised
The overall Government bonus within the LISA would amount to about 1.3% annualised (a 25% return on the money that is independent of how long it is in there - average investment horizon 17.5 years)
The investment return required to break even would therefore be 4.7% annualised

So it would only make sense if you can invest the money at a return of >4.7% per year over the 25 years. Obviously during the last 10 years you would need to use some other vehicle to save the money (and this would need to generate returns of 6% per year) because you cannot contribute to a LISA after the age of 50 and cannot access the money until the age of 60 - unless you forfeit the 25% bonus. That's based on the information we have about LISAs at this time.

I don't think you'll be able to earn >4.7% in a LISA without taking on considerable risk - the risk in this case will be that you lose your home if your investments do not perform.