Boost: Savers under 40 can open a Lifetime Isa and get a 25% government bonus.

Best cash Lifetime Isas: Savings for first-time buyers with a 25% bonus

Interest rates on Lifetime Isa savings offers are on the rise, which will boost many people who are struggling to get on the property ladder.

The best rate now pays 1.75%, whereas just two months ago the best offer only paid 0.85%.

Those saving for a deposit on their first home can open a Lifetime Isa (Lisa) if they are between 18 and 40 years old. It can also be used to save for retirement.

Boost: Savers under 40 can open a Lifetime Isa and get a 25% government bonus.

They can invest up to £4,000 a year and the government will add a 25% 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 per tax year until someone reaches the age of 50.

A Lisa can be used for a first home if the property costs £450,000 or less and the house is purchased at least 12 months after making its first payment in the Lisa.

It is also essential that it is their first home and that they are buying with a mortgage.

Anna Bowes, co-founder of Savings Champion, says: “It’s good to see Lisa rates going up along with everything else in the savings market, because with interest rates going up and therefore interest rates mortgages, it will be more difficult than ever for first-time buyers to afford their first new home.

“Unfortunately the interest rates on offer are far below the best rates available on other accounts – but of course the interest rate is meaningless when you can get a 25% government bonus on every deposit you make.

“Having said that, earning interest too is definitely icing on the cake.”

“With mortgage rates rising, anything that helps first-time buyers is welcome, so the Lisa is likely to continue to be popular.

“What’s missing is competition, because there are still very few providers offering Lisas. If more providers support the product, we could see higher rates, which would be great for young savers trying to get on the real estate ladder.

What’s the best deal?

The best deal is currently offered by the savings app, Nude, which is designed for those saving for a first home.

Nude’s money, Lisa, pays a return of 1.75%, making it the most generous offer on the market.

Beehive Lisa from the Nottingham Building Society is the next best deal. It can be opened with £10 and earns 1.3% interest.

However, there is a catch with Nude’s account. Unlike other providers, it charges a monthly fee of £2.

This means that your annual interest from the maximum holding of £5,000 will drop from £88 to £64 for the year.

However, savers opting for Nude will benefit from additional quirky features.

Its “Time to Buy Calculator” helps savers determine exactly how long it will take them to buy a home.

Nude says the calculator is interactive and personal for anyone who uses it, allowing them to play around with their inputs and outputs.

Nude also allows savers to connect 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 savings ideas based on their spending habits, which are updated every month based on their entries and expenses. These ideas only suggested if they could cut their shopping time by a month or more.

Nude also lets users team up with someone they shop with, letting them see both of their Lisas in one view so they can track their joint progress.

Should Isa Purchase Aid holders upgrade to a Lisa?

Although the Isa purchase assistance is now over, those who opened one before November 30, 2019 will be able to continue saving in their account until November 2029 and claim their government bonus until November 2030.

The Isa purchase aid allows prospective buyers to pay up to £200 per month.

The government then tops up their savings by 25% – 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 purchase property worth up to £250,000 outside of London using Isa’s purchase aid. However, in London the maximum purchase price is £450,000.

For those who have a help to buy Isa, one option is to transfer it to a Lisa.

They can put more in a Lisa – £4,000 a year – and the government will top it up by 25%.

It also allows them to buy 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 change.

“If you have more than £4,000 in your Isa purchase aid, you can only redeem £4,000 per tax year.

“The money that is traded will eat into your allocation for the current year, so if you use it all up with a trade, you may have to put the money you save for a deposit somewhere else until next April.

“It might be worth it, but you’ll have to calculate the best approach based on your situation.”

“If you’re worried about having to change, it’s worth thinking about it as soon as possible. You don’t necessarily need to transfer all the money immediately, just funding it with £1 will start the countdown.

How Lisa Works

How Lisa is used for a house deposit

When a Lisa holder purchases a property, it is important that they do not simply withdraw the funds, as this will incur penalty charges.

Instead, they have to go to their Lifetime Isa provider to have the money sent to the attorney handling your purchase.

The money can be used for deposit when they trade contracts, although there can be no more than 90 days of delay between this and completion.

If the sale fails, the lawyer will be able to put the money and the bonus back into the Isa for life – although it is the same amount.

How the Lifetime Isa Penalty Works

The thing to watch out for on the Lifetime Isa is that money that does not qualify as a first home deposit is heavily penalized if withdrawn before age 60.

If you 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 proper home deposit, the 25% 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 it’s best to invest if you don’t plan to use the money for at least five years. For anyone with a shorter time frame, cash will be considered the safe option.

However, given the lowest savings rates, soaring inflation and the government top-up buffer of 25%, there may be an added temptation for lifetime Isa holders to invest – although within reasonable limits.

After all, given the Lifetime Isa bonus, your investments would have to drop more than 25% for you to be down from what you paid in.

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Best cash Lifetime Isas: Savings for first-time buyers with a 25% bonus

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