LISA, Savings or Interest Only?

SeriousScrooge

I'm wondering if it's better to use a LISA or savings for a house deposit if they at a similar level?

The LISA is tax free but not as accessible. Lack of accessibility helps it accumulate over time, where as if I was disciplined with my saving it would incur tax when it accumulates, especially if the ISA allowance is cut as predicted.

Using the LISA still gives access to savings. Also, the LISA can't be split, so if it grows beyond the FSCS protected limit, it would put it at risk.

There's an option to combine the LISA with the savings for a large deposit to reduce the size of the mortgage, but would remove the safety of having money saved for retirement etc. Would this work out financially better in the long run? These things vary, but I'd imagine on average it's a higher rate of interest on the mortgage than what could be earned in savings.

What about an interest only mortgage or a mortgage that offsets against savings. Would these be better options?

ACG

What do you want to use the LISA for? 
I dont get many people who go above the FSCS protection limit with savings for a house. Are you thinking about using it more for retirement? 

Your questions are very open ended and there is no where near enough information. Have you thought about speaking to a financial adviser or mortgage adviser (depending no what your preference is?). 

Interest only mortgages tend to cost more and come with additional requirements (certain size deposit, income etc). Offset mortgages are quite rare now, so they are also more expensive than a normal fixed rate. But depending on your circumstances they may still be the best option - again, its probably worth speaking to a mortgage broker as your question is quite vague and best advice would depend on the finer details. 

SeriousScrooge

Thanks ACG.

My initial idea was to use the LISA to pay the deposit for a house. It seemed like a 'safe' idea to do that and keep access to savings for emergencies. Now I'm wondering if it's better to use savings so the interest on the LISA can accumulate for when I retire.

The other option I'm considering is to use the LISA and the savings for a larger deposit, so I ultimately pay back less interest on the mortgage.

I know a lot depends on interest rates. If you get a higher rate on your savings than on the mortgage, you'd probably end up financially better off.

Assuming the property is £100,000
Assume a 10% deposit from either LISA or savings
£90,000 mortgage
4.5% interest over 25 years = £150,017 total repay

Using both the savings and the LISA on the same conditions would have a total repay of £133,348
This would save £16,669 over the 25 year period

Assuming the same 4.5% interest, the £10,000 LISA or savings would be worth £30,054.34 in the same 25 year period, earning £20,054.34

All things being equal, I'd be financially better off with a smaller deposit and keeping the rest in savings. Of course, the interest rates will fluctuate on all of these across the 25 year period. If the savings/LISA earn 3.5% interest, it would only be worth £23,632.45, so the larger deposit would have been the better option. Of course, this is all assuming no further savings are added throughout the period. The LISA is exempt from tax and pays a contribution of 25% on what's put in, so it would be better to make additional savings into the LISA when possible throughout.

It was this thought where I wondered if it's better to leave the LISA to accumulate interest rather than starting from scratch with it after using it for a deposit. If you could continue to save £100 per month into the LISA on 3.5%, it would be worth £74,145.54 at the end of the 25 year period. 

You'd probably end up paying tax on the interest earned through savings, but not from the LISA. If the interest rate went up or if you could contribute more, it would be higher than the FSCS protected limit.

Someone had mentioned interest only mortgages are better and someone else said to consider an offset mortgage, so wondered if these were better options. Judging by your reply, this isn't the case.

Edi81

Interest only mortgages are only available to high earners -£75k plus. 

Saving for retirement in a LISA which is a savings account is a bad idea - you need to be in the stock market. How old are you?

SeriousScrooge

Early 30s. Nowhere near a high earner   
The stock market would never equal a 25% return (LISA bonus). Capped at 4k a year, but many people (including myself) couldn't save/invest that much every year anyway, especially if paying a mortgage.

Newbie_John

Let's say you retire in 30 years. Most LISAs are about 2.5% interest rate (I ignore the ones with big % in first year).
If you put £4000 now to LISA and get £1000 bonus (total £5000) assuming rate 2.5% stays for 30 years, you will have £10500.

Now if you keep £4000 in savings at 3.5% rate consant for 30 years you will have more, about £11k.
One of the safest items in Stock Market are government bonds called Gilts. Some of the long term 20-30 years pay over 5%. So putting £4k there will result in.. £17k.


I would use LISA for deposit.