Best cash Lifetime Isas: First-time buyer savings with a 25% bonus

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 percent, when only two months ago the best deal paid just 0.85 percent. 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 percent 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 percent 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 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 for £10 and pays 1.3 percent 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 personalized 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 Help to Buy Isa has now ended, 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 up to £200 each month.

The Government then top up their savings by 25 percent – up to a maximum of £3,000 each tax year – when they purchase their first home.

It also differs from 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 percent.

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 the 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.’