Lifetime ISA - withdrawing exactly at 12 months - is it worth it?

hoth0416

Hi all

We took out a LISA each in March 2018 with the expectation our new build plot wouldn't be available for sale until mid-2019. Low and behold it became available in September 2018.

We'd both put in the £4k in late March 18 so got the bonus for 2017/18. We haven't yet put in the £4k for 2018/19 as:

1) We were earning more interest on it elsewhere, so thought we'd do it 'when we had to'
2) As September came - we realised we may have to withdraw early

The early withdrawal is £250 each which we can live with (and we used this as a bargaining tool with the developers).

However, taking a look more closely - our completion is due for mid March 2019... And our Lifetime ISA 12 month window expires in Mid-March 2019.. so this could work out timing wise.

My question is - I've got a mortgage offer on the assumption we wouldn't get the bonus, as ideally, we'd have wanted to use the funds as a deposit helper anyway (as opposed to saving a small amount each month on the mortgage!).

But as the earliest we could withdraw would be on completion, how would this work? From our LISAs, we would have £10k (4k each deposit with 2k each bonus) - or if we put in another 8k (for 2018/19) we'd have £20k.

My questions are:

1) If the completion date worked out with the withdrawal date and we could withdraw our LISA funds, would it be a case of our mortgage just being £20k less?

2) As the monthly savings wouldn't really be huge (as opposed to not putting the funds towards the house and facing the penalty), is there any way we could actually see the cash as it would essentially be replacing the funds we used to actually pay the deposit. Appreciate this may not work but just trying to work out how I can make the LISA work on completion...

I'm essentially considering whether I should just take the small penalty and take back most of the £8k as otherwise it would just be sucked into the mortgage if I tried to use it for the house.

Any thoughts would be appreciated.

eskbanker

Other than waiting until you're 60, the only way of avoiding LISA withdrawal penalties is to put the money towards the purchase price of your first property, either at exchange or completion, at least a year after opening the account.

hoth0416

Yep I'm clear on that point - so we have two options:

1) Withdraw and get back £7,500 of the £8k we've collectively put in (after the 25% takes away the bonus and £500 of our deposit.

2) Have the solicitor draw £10k from the LISA in March alongside my completion.

My question is then:

With option 2, will that £10k just go to reducing the mortgage? As the cash benefits of each option are as follows:

1) Get £7,500 back immediately (albeit lose £500)

2) Don't get anything back (cash in hand), LISA funds reduce my mortgage monthly payment by negligible amount.

Therefore I wanted to know what the benefit was of using the LISA on completion. Is there any way from either the LISA or my mortgage to actually get some funds back - as in an ideal world the LISA funds would have been used for my deposit.

Appreciate this is unlikely but wondering if there are any ways to go about doing this.

eskbanker

hoth0416 wrote: »

in an ideal world the LISA funds would have been used for my deposit.

Appreciate this is unlikely but wondering if there are any ways to go about doing this.

The LISA money does exactly this - not only can it be used for your deposit (either the advance one at exchange or any residual shortfall at completion) but it must be used that way if you're looking to avoid withdrawal penalties, hence my previous comment that the money must be put towards the purchase price of your first property.

Either way round, yes, it ultimately reduces your mortgage, rather than being available as cash, but if (as quoted above) you ideally want the money to be used as all or part of a deposit then that's fine.

The amibiguous term 'deposit' often seems to cause confusion as it's used to cover two different things, as explained at https://www.moneysavingexpert.com/savings/help-to-buy-ISA/#exchange (and it looks like you've used a third meaning by using it to refer to the money you've paid into your LISA!).

hoth0416

Thank you for sending that.. you're absolutely right I have not truly understood the term 'deposit'.

I've seen this article - https://www.blandy.co.uk/blog/buying-a-property-the-deposit-explained - am I right in saying that this says that there's a possibility that I can end up using the LISA amount effectively as the 'exchange deposit' but instead paid at completion... all of which essentially means I can use less of my 'other savings' towards the house?

I assume this is something I need to ask my solicitor - but I'm not exactly sure what I'm asking...

Apologies if I've completely misunderstood....

eskbanker

That article is saying much the same as the MSE piece linked above, as far as I can see!

Perhaps it'll help to look at it this way....

There are basically three separate elements that have to add up to the purchase price:

1. The exchange deposit, typically 10%, paid on exchange of contracts
2. The mortgage amount received from your lender
3. The balance of whatever is left to ensure that it all adds up to the agreed purchase price, payable on completion

If you're looking to avoid withdrawal penalties then LISA money must be used towards either 1 or 3.

If it's still confusing, perhaps if you post actual numbers for your purchase (property value, LISA funds (£20K?), other savings, assumed mortgage, etc) then we can highlight how you can fit it all together....

hoth0416

Thanks again - okay I've set out all of the information below:

Background facts

Our combined position is currently:

General savings (non LISA) = c.£50k
LISA = £10k (which is £4k deposit each in FY17/18 and £1k bonus each / no FY18/19 deposit made yet)

House price: £370k
Mortgage offer: £333k
Exchange deposit: £37k
House reserved (new build): September 18
Exchange: Due within next week
Completion: End of March 2019
LISA 12 month 'restriction' ends: Mid March 2019

I foresee the following scenarios:

SCENARIO 1

Here, we want to avoid using £37k of our 'General Savings' for the exchange deposit, making use of the LISA if we can.

Our ideal scenario would be to deposit another £8k in to the LISAs (say, next week), have the bonus for FY18/19 paid into the account (by January if we deposit next week), so that in Mid-March we can withdraw £20k from the LISA (we can get all the forms ready so the timing should be fine).

Our exchange deposit will effectively then be made up from £17k from 'General Savings' and £20k from the LISA.

The net savings that will consequently have been used from the current 'General Savings' balance above are:
- £8k (the additional amount put into the LISA next week)
- £17k to top up the deposit to £37k

So therefore my closing balances would be:
General Savings: £25k (which is £50k -£8k -17k)
LISA: £0
Mortgage: (£333k) paying c.£1200p/m

My question:

Is this possible or would we be expected to pay a full £37k next week?

Or - can we use one of the methods mentioned in the above post to make this work (where we possibly pay only £17k now with some sort of guarantee to bind us to the remaining £20k when the LISA is drawn)?

If so - how do we do this and what do we need to tell our solicitor?

SCENARIO 2

If the above is not possible, we would likely take the following approach:

Withdraw the LISA and incur the penalty. As there is a current balance of £10k, we would receive £7.5k back (a net loss of £500). This would return into our 'General Savings', which would then have a balance of £57.5k.

We would then use our 'General Savings' to pay the £37k exchange deposit.

So therefore our closing balances would be:
General Savings: £20.5k (which is £50k + £7.5k - £37k)
LISA: £0
Mortgage: (£333k) paying c.£1200p/m

Therefore compared to Scenario 1, a net loss of £4.5k (as I lose the £4k bonus and incur a £500 penalty).

SCENARIO 3

This wouldn't be our ideal scenario - but am I right in saying there is a scenario where the LISA would reduce the mortgage balance.

We would use our 'General Savings' to pay the £37k exchange deposit.

Assuming we do not deposit anything further into the LISA, and withdraw £10k to use against the balance to pay at completion, effectively reducing the mortgage required (is that correct?)

So therefore our closing balances would be:
General Savings: £13k (which is £50k - £37k)
LISA: £0
Mortgage: (£323k) paying c.£1150p/m

Therefore compared to both other scenarios, we take a huge hit to our General Savings balance for a small monthly reduction in the mortgage. This would be worse if we put in another £8k into the LISA for FY18/19.

As such - we would almost certainly not take this option.

Conclusion

We would like to know if option 1 is possible. And if so, what steps do we need to take to make it possible.

If not - we understand option 2 is probably our best bet, unless you think we are missing something?

Many thanks for all of your help - it's much appreciated. And apologies for any novice errors in our understanding!

eskbanker

Sorry, yes, in your situation where you're exchanging well before you've had the LISA for a year then you can't use (penalty-free) LISA money towards the exchange deposit, which is effectively defined as the sum payable at exchange of contracts, i.e. next week in your case, and therefore the exchange deposit has to come from your general savings.

You can ask your solicitor to negotiate the exchange deposit down from 10% to, say, 5%, though, which would deplete your general savings less - this would make the biggest difference to your financial evaluations so is worth pushing hard for if there is any leverage with the seller.

If a smaller exchange deposit isn't available to you, then option 1 as stated doesn't work, leaving the other two. Personally I'd be looking at total costs over the long term of the mortgage, so wouldn't necessarily see option 3 as worse than option 2 - yes, it costs £7.5K more up front versus option 2 but saving £50/month would pay that back in 12.5 years. If you filled the LISAs (to earn an extra £2K of free government money) then the extra costs (versus option 2) of £15.5K would be paid back by saving about £100/month off the mortgage to pay back in a similar timescale, but more beneficial thereafter.

Buying your first property is almost always a time when finances are stretched, so I can see why you'd be reluctant to leave yourselves with relatively low savings, but it's all about getting the balance right, bearing in mind that over time you'd expect both salaries and house prices to increase (relative to the fixed/reducing size of the mortgage), which often benefits those who've committed as much as they can up front.

hoth0416

Thanks so much for all of your help and advice on this.

I will speak to the solicitor to see what they can do on option 1.

I agree with you completely on options 2 and 3 that over the long term option 3 could be more beneficial (as you get the full bonus) - but as you quite rightly say there is a short term impact.

Considering the situation we're in at the moment, we will need short term savings (to furnish the house, keep for a rainy day, wedding, kids...etc) so my gut tells me it would have to be option 2. But definitely one to think a little harder about first before deciding for sure.

Really appreciate the time you've given to go through this with me.

I'll let you know how I get on..!

masonic

Hopefully you can negotiate option 1, but if not, then there is always option 4...

Don't make a withdrawal from the LISA for the exchange deposit or at completion, but treat it as part of your emergency fund, which hopefully you won't need to call on, but if you do it's only as bad as having gone with option 2 years before. If that "emergency" that depletes your savings down to zero doesn't materialise before you reach 60 then you've saved yourself the penalty.

hoth0416

That’s a really good idea - didn’t think of that! Thanks!

I’ve asked the solicitor and they’re going to get back to me. Fingers crossed!