Lifetime Isa rates reach nearly 5%: Should you open one to save for your first home?

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Over the last week, two cash Lifetime Isa providers each upped their rates, making the product worth another look if you’re saving to buy a first home.

Savings apps Moneybox and Plum were combatants in a battle at the top of our regular cash Isa savings table earlier this year, as providers duked it out to seduce savers with high short-term rates.

Moneybox is now back at the top of the table offering a Lifetime Isa rate of 4.8 per cent. However, this includes a 1.75 per cent ‘boost’ for 12 months, after which the rate will drop to 3.05 per cent. 

Plum* increased its rate to as high as 4.75 per cent, but it has since dropped to 4.25 per cent. This includes a 12-month boost of 0.89 per cent, after which it falls to 3.36 per cent.

With short-term boosted rates rife as providers woo savers to their platform, it pays to check underlying rates. Whichever account you open, you should consider transferring to a better rate after a year.

First-time buyer boost: Lifetime Isas help you save for a deposit

What is a Lifetime Isa? 

Lifetime Isas were introduced in 2017 to help Britons save for their first home or retirement. 

You can save up to £4,000 a year, which the Government tops up by 25 per cent. 

This helps turbocharge your savings and is a great option for first-time buyers – but with some important caveats. 

> Read more: The best Lifetime Isas

Who should consider saving into one? 

The best regular cash Isa is currently offered by Trading 212* with a boosted rate of 4.51 per cent for new customers, which the Moneybox cash Lifetime Isa comfortably beats.

If you don’t like short-term boosted rates, Tembo has a more straightforward Lifetime Isa rate of 4.1 per cent, well above the underlying rate offered by both Moneybox and Plum*.

If you’re prepared to invest, it’s worth looking into a stocks and shares Lifetime Isa. While there’s the risk of losing money, investing can generally beat returns on cash over the long term. AJ Bell Dodl* is an investment platform that’s suitable for beginners and also offers a competitive 4.06 per cent interest rate on uninvested cash.

In our view, a Lifetime Isa is well worth considering if you’re eligible and are planning to buy your first home in the next few years. It’s possible to bag up to £1,000 a year from the Government, boosting your deposit significantly.

You can pay into one alongside a regular Isa, so you don’t need to forgo easy access to your money. Just make sure you don’t go over your total Isa allowance of £20,000.

You must be aged between 18 and 39 to open one and the account needs to be open for 12 months before you can use the money to buy a property. 

If you think you’ll buy a home in the near future, a common tip is to start the clock by opening a Lisa with £1 as soon as you can.

Even if you don’t save into the account consistently, this should still allow you to bag a boost from the Government closer to when you’re ready to buy.

What about the caveats? 

Experts have criticised successive Governments for not reforming Lifetime Isas. In particular, there is a house price limit of £450,000, over which someone cannot use the money in their Lifetime Isa to help with the purchase. 

This has come under fire for staying at that level since the product was introduced.

Many experts would also like to see the penalty on withdrawals relaxed for when plans change. Savers are currently hit by a stiff 25 per cent penalty when withdrawing for any reason other than buying their first home or when they reach 60.

This affects the saver’s own contributions as well as the Government bonus.

But provided you’re aware of these caveats and plan for them, the account can be very effective for first-time buyers.

The benefits of Lifetime Isas get murkier when considered as a vehicle for saving for retirement. 

You can pay into the account until you’re 50, but generally speaking, savers should make the best use of a workplace or personal pension before using a Lifetime Isa for retirement savings. 

Find out more in our guide to the best self-invested personal pensions.