Is it worth us have LISAs?

LordSomebody

Hi all 

My partner and I will be first time buyers in about 5 years’ time. We live in an expensive area where we’d like to stay, and currently rent a home valued at £480,000.

There is a decent (but not definite) chance that our first purchase will be for in excess of £450,000, which I understand would mean we’d pay a penalty for withdrawing LISA funds.

We aren’t sure whether to accumulate £40k in our LISAs over the next 5 years, or do something else?

Thanks.

masonic

You seem to be in possession of all of the relevant information. In case you haven't considered all of the unknowns that might influence your decision:

• Nobody knows what will happen to house prices over the next 5 years or whether the £450k cap will change over that time
  
• There is currently no net penalty for withdrawing money from a LISA if your purchase did not meet the scheme rules. Nobody knows if this will still be the case in 5 years, whether the net penalty will return to ~6%, or some other penalty will be in force

Over 5 years, including the bonus, you would have accumulated somewhere north of £51k to put towards a qualifying purchase, £38k on a non-qualifying purchase if the original penalty returns, or £41k if things stay as they are now. I would suggest the main driver of the decision should be the probability of you making a qualifying house purchase. You probably aren't going to achieve better than £41.5k by saving the same money in a non-LISA savings account and 5 years is not really long enough to invest the money for a reasonable chance of exceeding those returns.

You should also consider whether £41.5k would be a large enough deposit to get an affordable mortgage on a property worth more than £450k in 5 years. That's another unknown not mentioned above: Nobody knows how willing banks will be to lend at high LTV, or where interest rates will be in 5 years time. Though perhaps you have additional funds you could commit to the purchase.

LordSomebody

Thank you masonic. That is very helpful. Yes, we will have other funds and earn £150k between us (although have childcare costs).