Loan to Lisa

GRhodes

Hi,

Is there any mileage in taking out a loan to put into a LISA?

Saving for a house is a painfully long process, especially when living and paying rent in London. I was wondering if there are any drawbacks to taking out a large loan to use for a deposit and using it to put into a LISA for a few years.

FirstDirect's 3.3% loan allows you to borrow £30k over 7 years*, paying back £400.33/mnth meaning a total repayment of £33,627.

The aim is to purchase a house in 4 years.

If I put £4k of that into a LISA for 4 years I would get a return of £4k (25% interest on the max £4k per year**) which would be more than the total interest on the loan.

As the max in a LISA is only £4k there would also be money left over to invest in a fixed rate ISA. With the remaining in an Isa (20k 1st/2nd year, 18k 3rd year, 14k 4th year) you'd get an interest of £1440 (assuming 2% interest).

So, in total after year 4 you would have £35,440 to put down on a deposit.

Let's say you put that down on a £300k house, (using First Direct) your repayment would be £1,196 per month.

At the same saving rate as the initial loan repayment rate (£400/mnth) it would take you a little over 88 months to save the £35k you’d have after 4years having taken the loan. If, after 4 years you can afford a house you're effectively start putting your money (via your mortgage) into an asset instead of your landlord's pocket.

So in the 44 (88-44=44) months between when you have bought a house, and when you could buy a house, if you hadn't taken the loan, you've put £52,624 into an asset (assuming your rent is the same price as your mortgage).

Loan + interest = £35,440
Asset = £52,624
Loan repayment = -£33,627
Meaning you're £54,437 better off at the same point you'd have been able to buy the house without the loan.

However, I'm unsure what the implications would be of taking out a 7 year loan on my credit rating and subsequent mortgage offering. I do not know if it's legal to put loaned money into the LISA scheme.

Can someone tell me whether I’m way off the mark with the above, and whether it would in fact be worth taking out the loan?

Thanks!

Assumptions
*FirstDirect loan the £30k at the rate listed on their website
**Government continue to support LISA

Thrugelmir

GRhodes wrote: »

FirstDirect's 3.3% loan allows you to borrow £30k over 7 years, paying back £400.33/mnth meaning a total repayment of £33,627.

First question you need to answer is whether First Direct will lend this amount of money on these terms. The fact that they "allow" does not provide any degree of acceptance.

GRhodes

Let's call that an assumption (added to original post)

ACG

Ive not read your entire post, but my initial thoughts are that not many lenders will allow a loan to form your deposit.

This is something I would be asking my account managers as it might be a loop hole. But if you do it without checking and then it gets picked up, you have potentially lost a valuation fee/booking fee/application fee/legal fees etc.

TrickyDicky101

ACG wrote: »

Ive not read your entire post, but my initial thoughts are that not many lenders will allow a loan to form your deposit.

This is something I would be asking my account managers as it might be a loop hole. But if you do it without checking and then it gets picked up, you have potentially lost a valuation fee/booking fee/application fee/legal fees etc.

My reading may be incorrect but I believe OP intends to fully repay loan before applying for mortgage (ie so OP is playing the long game) - she is merely intending to improve on her return from investing her income for those 4 years through making full use of the LISA by way of short term loan.

GRhodes

The question was whether you can use part of the loan for the mortgage. At time of buying (after 4 years). there would be 3 year (£14,411.88) left on the initial loan.

However, if it's not possible to use a loan for a mortgage deposit than the above is irrelevant!

TrickyDicky101

My reading was incorrect then!

That's a shame because I quite like the idea of arbitraging using the LISA.

But borrowing the deposit is something else (and not likely to be effective as ACG noted).

Thrugelmir

GRhodes wrote: »

Let's call that an assumption (added to original post)

"Putting the cart before the horse" springs to mind.

silvercar

ACG wrote: »

Ive not read your entire post, but my initial thoughts are that not many lenders will allow a loan to form your deposit.

This is something I would be asking my account managers as it might be a loop hole. But if you do it without checking and then it gets picked up, you have potentially lost a valuation fee/booking fee/application fee/legal fees etc.

Would make sense as an early gift from the bank of mum & dad. ie parents give a gift now that is intended to be used as a deposit in the future. Money goes straight into a LISA.