Save to get LISA bonus or use money to pay off 0% debts

greensalad

Hello everyone,
I have a bit of a query about what to do with my money. My partner and I recently decided to combine our incomes in our quest for a house deposit. As we both have roughly equal amounts of debt we are also pursuing paying off debts together as common goals, based on which is most pressing.

Our current finances stand like so:

£1,500 in emergency fund 
£2,999 0% Virgin credit card (promotional balance ends July 2021)
£5,499 0% MBNA credit card (promotional balance ends January 2022)
£2,655 6.9% Neyber loan

We have £1,374 disposable income per month to service debt/save.

Initially it seemed obvious to use it in the following order:

1) Pay off Neyber 
2) Pay off Virgin (promo balance is up soonest)
3) Pay off MBNA
4) Save £8k in two LISAs
5) Save elsewhere, once LISA allowance filled.

However I've been thinking about it and wondered if it makes sense for us to fill our LISAs before paying off our 0% debt. Though it seems uncomfortable to me to save cash (beyond emergency fund) when I still have debt to service, the £1k bonus is a lot. Even if we only filled one LISA before the amount is paid it's still a lot.
What would you do?

Sailtheworld

I’d pay off the expensive loan, fill the LISAs and try and get the balances down on the credit cards sufficient that if you can’t roll them over you could divert some/ all of that £1374 and blitz them in a few months.

I’d try and get that £1374 number up too.

greensalad

Our plan was always to pay off all debt before trying to get a mortgage. I guess I'm just not sure if I should pursue filling the LISAs to get that bonus first.

£1,374 is the highest we can go. We have already cut our bills down massively and got rid of most luxuries. 

dcs34

If you look at it say over a five-year basis paying into the LISA early might produce a greater overall value in terms of the overall worth, due to the 25% HMRC bonus. Of course the risk is if your circumstance change; if you invest into the LISA only to suffer a lose of earnings that prevent you from adequately making the debt repayments - the money tied up in the LISA will be prohibitive to access.

Thrugelmir

Once you've cleared Neyber loan then matters will start to snowball. Perhaps then clear the Virgin balance totally. Then pay MBNA enough to clear the balance by the end of the interest free period. 

grumiofoundation

I would agree with above poster pay off the expensive loan ASAP, pay into LISA* and pay off cards/have the ability to pay off cards before end of 0% period. 

With the amount will save per month you should be able to, by this time next year you should have been able to pay off the Neyber, virgin credit card, pay 4000 into both your LISAs and paid off half your MNBA card. Good luck! 

*The drawback of LISAs is the 25% withdrawal penalty (get back less than paid in) which means you can’t really pay in money you might need to access. However this penalty has been reduced to 20% (so only lose bonus) until April 2021 - so this removes a barrier to paying into LISA. 

greensalad

Thanks, this is good advice. What I will do is take the 0% periods on our cards and make sure we can pay off enough each month to meet the target, and then see if we can push more funds into LISA. I feel like otherwise we are throwing away the opportunity of several thousand pounds with the bonus. 

Neyber will definitely get paid off first though. I have 75% of it set aside already, awaiting an early settlement figure so it can be paid 1st July 

steampowered

From a pure financial point of view, you are better off saving into the LISA for the bonus, assuming you can still pay off the 0% debt before the interest free period ends.

Depending on how long you expect to be saving for your house deposit, it could be beneficial to extend the 0% period by taking out a 0% balance transfer, if that enables you to save more into the LISA.

However I do wonder if paying off the debt might force you to budget more on an emotional level? £11k of debt is quite a lot. On an emotional level, if you allow small LISA contributions to allow you to roll on the debt, you might be more likely to overspend.

Nuggy96

Another method is to get a balance transfer card, move that 1.3k to there and so no interest paid (stoozing). then put your money into a LISA

Nuggy96

However, to add if you're buying your property in the next 5 years, I would put in a cash LISA rather than Stocks and share as a high chance of a lower return in S&S
Second point would be that you can get a higher interest rate with your money by putting in a easy access savings account i.e. NS&I or Marcus, and wait until March to deposit into your LISA, you would then get the higher interest rate up to March, deposit in March and then get your 1k bonus for the tax year from LISA, which is what I did

greensalad

steampowered said:

From a pure financial point of view, you are better off saving into the LISA for the bonus, assuming you can still pay off the 0% debt before the interest free period ends.

Depending on how long you expect to be saving for your house deposit, it could be beneficial to extend the 0% period by taking out a 0% balance transfer, if that enables you to save more into the LISA.

However I do wonder if paying off the debt might force you to budget more on an emotional level? £11k of debt is quite a lot. On an emotional level, if you allow small LISA contributions to allow you to roll on the debt, you might be more likely to overspend.

We are well past the emotional level part of spending and saving. We have a rigid budget including a very rigid amount of discretionary spending per month. Our bills have been reduced to the lowest we can. We don't have expensive phones on contracts. We own our car outright. We don't have Sky TV or other expensive subscriptions. The only thing we could possibly reduce now is moving house and we've done the numbers on it and think the cost of moving is not worth it, because for a one bedroom property we'd only save a small amount that wouldn't be gained back for a long time and would only really put us one month ahead on saving our deposit target.
My forecasting means we should be able to buy end of 2021. I have factored in example fees for solicitors, moving costs along with the actual deposit. So we're only looking at gaining from a LISA once.