Home buyers looking to get onto the housing ladder for the first time can now access a ‘deposit booster’ deal that will boost their savings by £2,000.
First-time buyers had until recently been able to benefit from saving into a Help to Buy Isa, but with that discontinued they must turn to a Lifetime Isa to get a leg-up.
A Lifetime Isa gifts savers a 25 per cent boost worth up to £1,000 a year on their savings, which can be withdrawn without penalty either to use as either a deposit on their first home, or after the age of 60 for their retirement.
Now, a new deal from Newcastle Building Society is offering first-time buyers an extra £2,000 cash bonus when they use both the lender’s Lifetime Isa and take out a mortgage with them. But is Newcastle’s new deal worth it?
Newcastle’s Deposit Booster is available on both two and five-year fixed rate mortgages
How does it work?
Newcastle’s ‘Deposit Booster’ mortgage gives first-time buyers a £2,000 uplift when they use their savings from a Newcastle Building Society cash Lifetime Isa to buy their first home with a mortgage from the mutual.
An Isa is essentially a tax-efficient wrapper for savings or investments. Lifetime Isas, which were introduced two years ago, are designed for those either saving for their first home or saving for later life.
The successor to the popular Help to Buy Isa, which was discontinued last month, the Lifetime Isa gifts savers a 25 per cent bonus of up to £1,000 per year. Effectively, that amounts to basic rate tax relief, making saving tax-free.
You can have either a cash or stocks and shares Lifetime Isa – or hold both – but Newcastle’s new deal applies only to cash Isas.
Interest in this type of Isa surged 278 per cent among savers ahead of the closure of the Help to Buy scheme last month.
Unlike the Help to Buy Isa, where the bonus wasn’t paid until after a property purchase completed, with a Lifetime Isa savers receive the Government’s top-up in time for exchanging on a property, meaning you can use it as part of your deposit.
However, Newcastle’s bonus isn’t payable until the mortgage is completed – which means it can’t be used as part of the deposit in certain situations.
The product works on the basis that the £2,000 will be issued to the buyer’s solicitor along with the mortgage loan amount.
This means it can be used as part of the final transaction, rather than the 5 to 10 per cent of purchase price deposit usually paid to a solicitor in cash on exchange of contracts.
First-time buyers must have saved into their Lifetime Isa for at least one year to access their funds penalty-free.
The mortgage is available in two forms, a two-year fixed rate deal up to 95 per cent loan-to-value at 3.25 per cent, and a five-year fixed rate up to 95 per cent loan-to-value at 3.39 per cent.
Be aware, however, that if savers make a withdrawal not connected to either buying a first home or before the age of 60 from a lifetime Isa, then a 25 per cent penalty will apply to the amount withdrawn.
There are no fees attached, and mortgages are available from £75,000 up to a maximum of £400,000. While this would exclude some, the vast majority of first-time buyers would not be trying to access a bigger loan than this.
Lifetime Isas have surged in popularity since the popular Help to Buy Isa ended last month
The mortgage deal also comes with free valuations and allows for overpayments of up to 10 per cent of the outstanding loan per year, meaning borrowers with the means can pay their loans off quicker.
On the two-year fix, there are early repayment charges of 2 per cent in the first year, reducing to 1 per cent after that.
On the five-year deal, there are early repayment charges of 5 per cent in the first year, reducing by 1 per cent per year until the fifth year, after which repayment charges remain at 1 per cent.
Who is this for and how does it compare?
The deal works best for those trying to maximise their savings while buying their home quickly – and the effects will differ depending where in the country you’re buying.
For instance, according to the latest ONS House Price index, the average first-time buyer in London’s Croydon paid £309,029 in October this year. In this case, a 5 per cent deposit would be £15,451.
The quickest way for a first-time buyer to use a traditional Lifetime Isa to achieve this would be to save £12,000 over three years in the Lifetime Isa and get the Government top-up of £3,000 to bring it to £15,000 – just shy of the full amount. The extra £451 could be saved in another account.
For simplicity’s sake, these calculations exclude the small amount of interest the borrower would earn from putting their savings into the Isa.
A first-time buyer could get there quicker with Newcastle’s deposit booster by saving £8,000 in the Lifetime Isa over two years, adding their £2,000 Government top-up, plus the £2,000 Newcastle bonus to get to £12,000. To buy at the end of that period they would have needed to save an extra £3,451 outside of the Lifetime Isa.
Alternatively, they would need to keep saving into a Lifetime Isa and wait to claim their third year’s government bonus.
In areas with cheaper houses, such as Newcastle where the average first-time buyer mortgage is £147,714, the benefit is more obvious.
The average 5 per cent deposit in this case is £7,385.
A traditional Lifetime Isa user could achieve this in two years if they could save £4,000 in the first year, getting the £1,000 Isa bonus, then saving £1,908 in the second year, with a £477 bonus added, to get to the total of £7,385.
A Deposit Booster would allow them to get there much more quickly, however.
In this case, if they could save £4,000 in the Isa in one year, get the £1,000 government bonus, and then use the £2,000 Newcastle Building Society booster, they would be within £385 of their target – money which could be saved into a standard account elsewhere.
Again, although they would have to put away more each month to get there, overall this would save them £523 compared to using a normal Lifetime Isa.
Those taking longer to save would also benefit.
For example, somebody putting away £1,000 a year over five years would gain a government bonus of £1,250. The £2,000 bonus on top of this would then help them get over their savings over the line.
They would have to save for six years to reach that amount on a traditional Lifetime Isa – and would have to pay £500 more out of their own savings.
If you don’t use your savings to buy a first home or in retirement, you will incur a penalty
Are there better options?
There are cheaper two and five year 95 per cent loan-to-value mortgages out there than the Deposit Booster, but Newcastle’s offerings are still fairly competitive.
Newcastle Building Society itself offers a two-year fixed rate at 95 per cent loan-to-value at 2.84 per cent.
On a £100,000 mortgage taken over 20 years, this would result in monthly repayments of £547 – some £28 cheaper per month than someone with the same size mortgage would pay on the Deposit Booster option.
However, the Deposit Booster option has another twist – the introductory fixed rate offer is proceeded by a further discounted offer fixed for three years.
Instead of moving straight onto the lender’s standard variable rate of 5.99 per cent after two years like a mortgage normally would, it moves onto a discounted standard variable rate of 4.49 per cent for a further three years, before moving up again to 5.99 per cent.
This only applies to the two-year fix – the five-year fix moves straight to the standard variable rate after five years.
Lenders like Atom Bank and Virgin Money also offer cheaper deals. None of them comes with the additional £2,000 – but can be used in conjunction with different Lifetime Isas.
What about the Lifetime Isa?
Newcastle’s Lifetime Isa is only available to applicants up to 39 years old, but allows you to invest up to the age of 50.
It pays 1.10 per cent interest AER – not great as Lifetime Isas go. Paragon offers 1.15 per cent, while Nottingham Building Society offers 1.25 per cent.
Moneybox’s cash Lifetime Isa offers the best rate on the market of 1.45 per cent.
But in reality, with the 25 per cent bonus plus the £2,000 bonus, these differences are minuscule.
£1,000 in the best Lifetime Isa going over five years would result in £72.54 interest – just £17.51 more than Newcastle’s Isa.
To put this into perspective, you would have to leave £10,000 compounding for 14 years before this interest rate difference becomes more worthwhile than Newcastle’s £2,000 bonus.
And you can use Newcastle’s Isa with other mortgages – you just won’t get the £2,000 bonus.
But a really good deal will still save you money in the long run. Atom Bank’s best five-year 95 per cent fix would save a borrower with a £100,000 mortgage over 30 years some £97 a month compared the Newcastle’s five year deal.
This means they’d have saved more than the £2,000 bonus would have given them in less than two years.
However, the value in this deal also comes from the fact that it eases costs up front for those trying to get on the ladder – something that remains the biggest barrier for those trying to buy their first home.
You can find the best deals for yourself using This is Money’s mortgage finder tool.
You can also compare costs yourself using our true costs mortgage calculator.
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