LISA or Overpay Mortgage? lcfcstephen

#1
HI,



I currently have a mortgage and my wife has HISA. The plan is that we will move this HISA into a LISA when they become available (depending on rates and stuff) But I'm trying to work out if it's better to overpay on the mortgage or if it's better to max out the LISA. Below are some rough workings, but I'm concerned that they may be incorrect.



My current mortgage is 3.14% fixed for five years, with 4.5 years left. I currently overpay to £600 a month (it's actually £323) At the end of the five year fix my mortgage balance will be £39,350. If my payments were £500 a month the balance would be £45,250, and if my payments were £700 a month my balance would be £33,400. So the difference in £100 a month for the next four and a bit years is about £6000.



Currently the HISA has £3100 in it and it earns slightly over 2% (2.25, might be 2.5?). If she pays in £200 a month by the end of the same period she would have about £15,000 - £18,650 with the bonus. If those payments were increased to £300 she would have £20,500 - £25,700. These workings were based on the bonus being paid at the end and also a 2% constant interest rate, so the true figures would be slightly different, but not hugely. The difference in that being about £7000.



So to me, it looks like in our situation, as the plan was to use her HISA/LISA for the next house move then it would make sense to reduce the mortgage payments to max out the LISA. Do those figures work, and does that make sense?

#2



So to me, it looks like in our situation, as the plan was to use her HISA/LISA for the next house move then it would make sense to reduce the mortgage payments to max out the LISA. Do those figures work, and does that make sense?
Originally posted by lcfcstephen


I haven't bothered working through your maths. But basically a LISA gets 25% free money on her deposited funds.



If that deposit is made a year before you get to use the funds on a property purchase, that's like getting 25%, A YEAR!!!. Plus whatever percentage it pays her in "normal" interest on her balance over the year. Clearly, that's better than 3% a year or whatever your mortgage is costing.



If her deposit is made in drips- e.g. it's realistically not all paid exactly one year before she cashes it in, for a 25% gain in a year... but is instead paid a bit now, a bit next year, a bit the year after, a bit the year after that and a bit just before you buy the place, then on average her money has been "at work" for longer than a year so she hasn't earned 25% a year on it to compare with your mortgage rate. She has earned less than 25% a year. But if you look at it, her £20k or whatever has been deposited for - on average - about 2.5 years out of the five years. Some for 60 months, some only 1 month. So you could say she has earned 25% in average 2.5 years, which is close to a 10% annual return - especially when you add on the "normal" interest she's earned in the account as well as the bonus.



So, not quite as good as 25% better than overpaying the mortgage - but 25% in only 2.5 years is almost 10% of government bonus per annum, so when allied with the interest rate from even the least competitive LISA from the worst bank in town, is still going to beat the 3% a year you gain by paying down the mortgage.



So, seems a no brainer that if she can't really afford to save £333 a month of her own salary to max out the LISA, then you should divert funds that you would have otherwise spent on mortgage overpayments, to make sure you can get the biggest amount of free government money available in the timescale.



Even if she had to put the whole £20k in up front, rather than doing £4k a year for five years, then the bonus by itself would still have turned £20k into £25k in five years, which is like getting 4.6% AER tax free. And that's without counting the actual interest rate she gets on the account. And of course, she *doesn't* have to put the £20k in on day one, only a slow drip feed over time. It's just an example to show it's clearly going to be a no brainer to use this technique to buy your next house in five years, rather than reduce the existing 3.14% debt, so you don't need to bother doing the exact maths.



One reason it wouldn't be a no brainer would be if the dream house you eventually want to buy ends up costing over £450k so she won't qualify to get the bonus to buy it and has to pay a penalty to take her cash back out of the LISA (assuming she can't afford to keep it in there to age 60).

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