Interest rates on Lifetime Isa savings deals are on the rise in what will come as a boost to many struggling to get on the property ladder.
The best rate now pays 1.75 per cent, when only two months ago the best deal paid just 0.85 per cent.
Those saving for a deposit on their first home can open a lifetime Isa (Lisa) if they are aged between 18 and 40. It can also be used to save for retirement.
Boost: Savers under the age of 40 can open a Lifetime Isa and get a 25% government bonus.
They can put in up to £4,000 a year and the Government will add a 25 per cent bonus to their savings, up to a maximum of £1,000 per year.
This means that for every £4 saved, the Government will add £1 up to a maximum of £1,000 every tax year until someone turns 50.
A Lisa can be used towards a first home if the property costs £450,000 or less and the home is purchased at least 12 months after they make their first payment into the Lisa.
It is also essential that this is their first home and they are buying with a mortgage.
Anna Bowes, co-founder of Savings Champion says: ‘It’s good to see Lisa rates rising as well as everything else in the savings market, as with increasing interest rates and therefore mortgage rates, it’s going to be harder than ever for first time buyers to afford their first new home.
‘Unfortunately the interest rates on offer are far lower than the best rates available on other accounts – but of course the interest rate pales into insignificance when you can get a 25 per cent Government bonus on each deposit made.
‘That said, earning interest as well, is definitely a cherry on the top.
‘With mortgage rates rising, anything that can help first time buyers is welcome so the Lisa is likely to continue to be popular.
‘What is lacking is competition, as there are still very few providers who offer Lisas. If more providers support the product, we could see higher rates which would be great for young savers who are trying to get onto the property ladder.’
What is the best deal?
The best deal is currently being offered by the savings app, Nude, which is designed for those saving up for a first home.
Nude’s cash Lisa pays a 1.75 per cent return making it the most generous deal on the market.
Nottingham Building Society’s Beehive Lisa is the next best deal. It can be opened with £10 and pays 1.3 per cent interest.
However, there is one catch with Nude’s account. Unlike the other providers, it charges a £2 monthly fee.
This means that your annual interest from the maximum £5,000 holding will fall from £88 to £64 for the year.
However, savers opting for Nude will benefit from some extra quirky features.
Its ‘Time to Buy Calculator’ helps savers work out exactly how long it will take to buy a home.
Nude says the calculator is interactive and personal to everyone who uses it, allowing them to play around with their incomings and outgoings.
Nude also allows savers to connect multiple bank accounts to their Nude app to get a full picture of their income and expenses in one place.
They can also get personalised money-saving ideas based on their spending habits, which are updated every month in line with their incomings and outgoings. These ideas only suggested if they could cut their time to buy by one month or more.
Nude also allows users to team up with someone they are buying together with, enabling them to see both of their Lisas in one view so that they can track their joint progress.
Should Help to Buy Isa holders switch to a Lisa?
Although the the Help to Buy Isa has now ended, for those who opened one prior to 30 November 2019 will be able to continue saving into their account until November 2029 and claim their Government bonus up until November 2030.
The Help to Buy Isa allows aspiring first-time buyers to pay in up to £200 each month.
The Government then top up their savings by 25 per cent – up to a maximum of £3,000 each tax year – when they purchase their first home.
It also differs from the Lisa in that they can only buy a property worth up to £250,000 outside London using a Help to Buy Isa. However, in London, the maximum purchase price is £450,000.
For those that have a Help to Buy Isa, one option is to transfer it to a Lisa.
They can put more into a Lisa – £4,000 a year – and the Government will top it up by 25 per cent.
It also allows them to buy a property worth up to £450,000 anywhere in the country. However, there are a number of factors to be aware of before switching.
Sarah Coles, personal finance expert at Hargreaves Lansdown says: ‘You need to understand the mechanics of the switch.
‘If you have more than £4,000 in your Help to Buy Isa, you can only switch £4,000 in each tax year.
‘Money that’s switched will eat into your allowance for the current year, so if you use it all up with a switch, you may need to put cash you’re saving for a deposit somewhere else until next April.
‘It might still be worth it, but you’ll need to calculate the best approach for your circumstances.
‘If you’re concerned you may need to switch, it’s worth thinking about it sooner rather than later. You don’t necessarily have to switch all the money over immediately, just funding it with £1 will start the clock ticking.’
How the Lisa works
How Lisa is used for a house deposit
When a Lisa holder buys a property it is important that they do not simply withdraw the funds, as that will incur penalty charges.
Instead, they need to apply to their Lifetime Isa provider for the money to be sent to the solicitor handling your purchase.
The money can be used towards the deposit when they exchange contracts, although there cannot be longer than a 90 day delay between this and completion.
If the sale falls through, the solicitor will be able to put the money and bonus back into the Lifetime Isa – though it must be the same amount.
How the Lifetime Isa penalty works
The thing to watch out for on the Lifetime Isa is that money that doesn’t qualify as a deposit for a first home is heavily penalised if it is withdrawn before the age of 60.
If you paid in £1,000 and received the £250 Government bonus, you would have accumulated £1,250, assuming no investment growth.
But if you then withdrew the money without using it for a suitable home deposit, the 25 per cent penalty would apply to the £1,250, leaving you with £937.50 – and £62.50 out of pocket.
Should you save or invest with a Lifetime Isa?
There are two options for Lifetime Isas: cash, and stocks and shares. General investment advice has always been that investing is best if you don’t plan to use the money for at least five years. For anyone with a shorter timeframe, cash will be deemed the safe option.
However, given rock bottom savings rates, soaring inflation and the buffer of the 25 per cent Government top-up, there may be an extra temptation for Lifetime Isa holders to invest – albeit within reason.
After all, given the Lifetime Isa bonus, your investments would have to fall by more than 25 per cent for you to be down on what you have paid in.
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