LISA & Nominated Mortgage Products

TommmyT · 6 August 2017 at 11:24PM

I am looking to open a LISA with the intention to use the savings for my first home.

The LISA has been spoken about very positively on the forums and by Martin Lewis, however, I have one query as it pertains to the mortgage products that will be available when I come to the position to buy.

For background, the Help to Buy ISA customers had to go with a mortgage product specified by the government "Help to Buy" scheme - products with interest rates almost double that of mainstream products available.

Will first time buyers using LISA savings be forced to take outa specified mortgage product in order to be able to use their LISA savings? Or will it be a case that the first time buyer can go to a mortgage broker of their choice? Wanted to find some clarity on this before I started this type of savings. Would be rather annoying to have to take out a specified mortgage product with a crazy high interest rate.

Hope someone can help!

eskbanker · 7 August 2017 at 12:23AM

TommmyT wrote: »

the Help to Buy ISA customers had to go with a mortgage product specified by the government "Help to Buy" scheme - products with interest rates almost double that of mainstream products available.

Are you confusing the HTB ISA scheme with the (separate) HTB mortgage guarantee or equity loan ones perhaps?

To the best of my knowledge there has never been any such linkage between these schemes, and HTB ISA (and LISA) purchases can be made using any mortgage product....

Bullet point 5 at http://www.moneysavingexpert.com/savings/help-to-buy-ISA confirms this:

You can use it with any mortgage type, it DOESN'T have to be a Help to Buy mortgage (though it can be), but it must be a residential mortgage, including self-build and shared ownership, but not buy-to-let.

TommmyT · 7 August 2017 at 10:05AM

Hi eskbanker, thanks for your reply!

Having read reviews on the 'Help to Buy' scheme, I understand that first time buyers going to their choice of mortgage provider have been stung with high rates. These buyers with Help to Buy ISA money are given interest rates higher than those people with deposits from other savings.

Can you confirm or deny whether this is happening and whether this is likely to be the case with the LISA?

eskbanker · 7 August 2017 at 11:42AM

I have no detailed knowledge of exactly what products and rates HTB ISA buyers are getting but was just pointing out that they're not obliged to go to "a mortgage product specified by the government "Help to Buy" scheme - products with interest rates almost double that of mainstream products available" because they are able to use mainstream products!

All that a HTB ISA does is to help first time buyers build up a deposit - to the best of my knowledge there's not actually any requirement for a first time buyer to inform a mortgage lender that they're using an HTB ISA so I fail to see how lenders could offer differential products in the way you appear to be suggesting.

Having said that, chances are that first-time buyers will often be those with small deposits anyway and therefore high LTVs and so more prone to worse mortgage deals, but that's a factor of their overall financial position rather than a constraint of the HTB ISA scheme itself.

Do you have any links to the stuff you've read about this?

TommmyT · 7 August 2017 at 4:47PM

I understand what you are explaining eskbanker, however, I completely disagree with your point that there is no need to inform a mortgage lender that they are using a HTB ISA. The reason being is that the first time buyers do not actually get the physical 25% bonus from the government when it comes to putting a deposit down, but it is only after completion that the bonus is given to the individual. It has been well documented that this is not made completely clear, and so many HTB buyers will think they have 25% extra on top of their HTB savings, when in fact they do not.

eskbanker · 7 August 2017 at 5:17PM

Not this again!

I'm well aware of the confusion that's arisen between the two different interpretations of what the ambiguous term 'deposit' means (i.e. some think of it as the advance downpayment made to secure a property at exchange of contracts while others use it to refer to the amount of equity contributed outside of the mortgage value, as per http://www.moneysavingexpert.com/savings/help-to-buy-ISA#exchange) but that's irrelevant to this discussion!

My point was that when a buyer approaches a lender and seeks a mortgage of x% of the property value, the lender's offer will vary according to how high that x% is, i.e. a 90% mortgage will typically be on worse terms than, say, a 50% one.

However, the source of the non-mortgage funds isn't a factor, i.e. a lender is hardly going to give a worse deal to a 90% LTV loan where there 10% includes HTB ISA proceeds than a 90% deal that doesn't involve an HTB ISA, because it's nothing directly to do with the lender. Neither is the scheduling of the bonus payment, so I don't follow your logic at all!

As for "many HTB buyers will think they have 25% extra on top of their HTB savings, when in fact they do not", they do have 25% extra on top of their savings (provided they adhere to all relevant Ts & Cs of course) but this isn't available at exchange, only at completion.

Likewise, "it is only after completion that the bonus is given to the individual" needs to be corrected: the bonus isn't given to the individual, it's given to the conveyancer, and it's at the time of completion, in fact just ahead of it (to allow its use in the purchase), rather than afterwards.

bowlhead99 · 12 August 2017 at 3:56PM

TommmyT wrote: »

Having read reviews on the 'Help to Buy' scheme, I understand that first time buyers going to their choice of mortgage provider have been stung with high rates. These buyers with Help to Buy ISA money are given interest rates higher than those people with deposits from other savings.

Can you confirm or deny whether this is happening and whether this is likely to be the case with the LISA?

Eskbanker is correct.

If the first time buyers are going to "their choice of mortgage provider" and being stung with high rates, they should have made a different choice of mortgage provider that did not charge them high rates and only charged them normal rates for the amount they needed to borrow (95%, 90%, 80%, 60% or whatever of the total property value).

With a HTB ISA, the solictor handling your purchase will collect the HTB ISA bonus from the government agency handling it, right before completion, giving you more money in the solicitor's account to be sent to the seller of the property and thereby reducing the total size of mortgage you need. The bank or building society lending you the mortgage does not care whether the money you are putting in came from your current account or ISA account or a bonus collected on the ISA account. They are lending you a total of £xxx,xxx on a property worth £yyy,yyy and will set their interest rate accordingly, nothing do to with whether you used an ISA bonus or not.

The ISA bonus is *not* given to you after completion. It is collected on your behalf and paid over to the seller of the property and is quite specifically not allowed to be given to you cash in hand.

As such, at completion time, the seller gets cash from a few sources: some money from the mortgage company ; some money from the solicitor that was collected from the HTB ISA scheme ; and perhaps also some more money from you that wasn't paid over at deposit time because he only wanted 10% initial deposit and you want to contribute a few thousand more than that so you held on to the extra yourself until completion was actually happening.

Whatever is put in from your own pocket or collected from the ISA bonus at completion time is going to reduce the total amount you need to borrow from the mortgage lender but the lender doesn't care how you finance it as long as it isn't the proceeds of crime or from borrowing money from other people.

I agree with eskbanker that you have probably confused tales you read in the media and misunderstood them.

Aside from the Help to Buy ISA which is one method of govt assistance for first time buyers, involving paying a bonus on the ISA balance as discussed above - a simple cash bung to you as a first time buyer - there are other government-sponsored Help to Buy schemes. These involve for example buying a share in a new property when you only have to finance part of it yourself and get a government equity loan to support the rest of it, or perhaps letting you have a really high percentage mortgage and the government guarantee some of it for the lender so they can let you have a lower rate.

Those are completely different schemes and they change the profile of risk for the lender over the term of the loan so only certain lenders offer them and therefore you might not get the same competitive interest rates when you go shopping around for 'help to buy mortgages' versus 'normal mortgages'.

If you are just using a help to buy ISA to get the free cash bung from the government, you are not looking for a specialist mortgage product, and can just use a 'normal mortgage', with the same pricing as is available to everyone else for the level of borrowing you want.

LISA & Nominated Mortgage Products

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