Interest rates on Lifetime Isa savings deals are on the rise, which will provide an incentive for many struggling to get up the real estate ladder.
The best rate now pays 1.75 percent, while just two months ago the best deal paid just 0.85 percent.
Those who save for a down payment on their first home can open a lifetime Isa (Lisa) when they are between the ages of 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 adds a 25 percent bonus to their savings, up to a maximum of £1,000 a year.
This means that for every £4 saved, the government will add £1 up to a maximum of £1,000 each tax year until someone turns 50.
A Lisa can be used for a first home if the property costs £450,000 or less and the home was purchased at least 12 months after they made their first payment to the Lisa.
It is also essential that this is their first home and they buy with a mortgage.
Anna Bowes, co-founder of Savings Champion says: ‘It’s good to see Lisa rates rising, as is everything else in the savings market, because with interest rates rising and thus mortgage rates it will be harder than ever for new buyers . to pay for their first new home.
“Unfortunately, the interest rates on offer are much lower than the best rates available on other accounts – but of course the interest is dwarfed if you can get a 25 percent government bonus on every deposit you make.
That said, earning interest too is definitely icing on the cake.
“With mortgage rates rising, anything that can help first-time buyers is welcome, so the Lisa is likely to remain popular.
‘What is missing is competition, because there are only a few providers that offer Lisa’s. If more providers support the product, we could see higher rates, which would be great for young savers trying to get up the real estate ladder.”
What’s the best deal?
The best deal is currently offered by the Nude savings app, which is designed for those saving for a first home.
Nude’s cash Lisa pays a 1.75 percent 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 percent interest.
However, there is one caveat with Nude’s account. Unlike the other providers, it charges a monthly fee of £2.
This means that your annual interest on the maximum property of £5,000 will fall from £88 to £64 during the year.
Savers who opt for Nude, however, will benefit from some additional quirky features.
The ‘Time to Buy Calculator’ helps savers calculate 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 incoming and outgoing expenses.
Nude also allows savers to link multiple bank accounts to their Nude app to get a complete picture of their income and expenses in one place.
They can also get personalized money-saving ideas based on their spending habits, which are updated each month according to their income and expenses. These ideas only suggested if they could shorten their buying time by a month or more.
Nude also allows users to collaborate with someone they are co-purchasing with so that they can see both of their Lisas at a glance so they can track their joint progress.
Should Help to Buy Isa holders switch to a Lisa?
Although the Help to Buy Isa has now ended, those who opened one before November 30, 2019 can continue to save in their account until November 2029 and claim their government bonus until November 2030.
With Isa Buying Help, first-time buyers can pay up to £200 each month.
The government then tops up their savings by 25 percent – up to a maximum of £3,000 per tax year – when they buy their first home.
It also differs from the Lisa in that they can only buy a property worth up to £250,000 outside of London using a Help to Buy Isa. In London, however, the maximum purchase price is £450,000.
For those who have a Help to Buy Isa, an 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 consider before making the switch.
Sarah Coles, personal finance expert at Hargreaves Lansdown, says, “You have to understand how the switch works.
‘If you have more than £4,000 in your Help to Buy Isa, you can only transfer £4,000 in any tax year.
“Money transferred will be at the expense of your balance for the current year, so if you use it all up with a switch, you may have to put the money you save for a down payment somewhere else until April next year.
“Maybe it’s still worth it, but you’ll have to calculate the best approach for your circumstances.
“If you’re concerned that you might have to switch, it’s worth thinking about it sooner or later. You don’t necessarily have to exchange all the money right away, as long as you finance it with £1 the clock will start ticking.’
How the Lisa works
How Lisa is used for a home deposit
When a Lisa holder buys a home, it is important that he does not simply withdraw the money, because that entails fines.
Instead, they must apply to their Lifetime Isa provider to send the money to the attorney handling your purchase.
The money can be used for the deposit when they exchange contracts, although there should be no more than 90 days of delay between this and its completion.
If the sale does not go through, the lawyer can return the money and the bonus to the Lifetime Isa, although it must be the same amount.
How the Lifetime Isa Penalty Works
The thing to be aware of with the Lifetime Isa is that money that does not qualify as a down payment on a first home will be severely penalized if withdrawn before age 60.
If you had paid £1,000 and received the government bonus of £250, you would have accumulated £1,250 assuming there was no investment growth.
But if you then withdraw the money without using it for a suitable home deposit, the 25 per cent penalty would apply to the £1250, leaving you £937.50 and £62.50 out of pocket.
Saving or investing 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 plan on not using the money for at least five years. For anyone with a shorter time frame, cash is considered the safest option.
However, given the bottom saving rates, rising inflation and the 25 percent buffer of the government surcharge, there may be an additional temptation for Lifetime Isa holders to invest – albeit within reasonable limits.
After all, given the Lifetime Isa bonus, your investments would have to drop by more than 25 percent to have less than what you put in.
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