Use LISA to pay off DEBT?

JJM236

Hi guys, I have a £5500 loan at (4.9%) and £6500 in a LISA (earning 1%). I believe that due to COVID the penalty for withdrawing a LISA has been lowered to 20% rather than 25%. 
If I withdraw, does this mean I just lose the bonus and none of my own money?
If so, is it advisable to withdraw the LISA and pay the loan off?

Thanks in advance. 

J

eskbanker

During the current concession you would 'only' lose the bonus rather than 'your own' money but of course that bonus has already been added and is already yours, assuming you use it for a first property purchase as presumably intended, so I'm not convinced it'll make sense to lose that money.  The 25% bonuses you've earned to bump your £5,200 up to £6,500 would effectively represent about five years worth of interest on the loan, so I'd be tempted to simply stop funding the LISA and throw all surplus income at the loan instead, but that depends to a certain extent on what your plans were to repay the loan and over what sort of term?  How much monthly surplus do you have from your income?

JJM236

Loan costs about 430 a month and there is still 3 years odd left on it.

I have about #1500 surplus which I have been throwing at it but would like to be Debt free ASAP.

eskbanker

JJM236 said:

Loan costs about 430 a month and there is still 3 years odd left on it.

I have about #1500 surplus which I have been throwing at it but would like to be Debt free ASAP.

I can't make sense of those figures - three years of £430/month is £15,480, which is way more than 4.9% interest on £5,500?  If your monthly surplus is £1,500 and you're keen to prioritise debt repayment then you should be able to clear the loan in four months, without touching your LISA money?

JJM236

My apologies. The loan was originally 14500 over 3 years, paying 433 a month at an interest rate of 4.9%.

During lockdown I have been able to bring that amount down to £5941 and I am putting everything thats left in my current account each month (average £1500) to pay it off. This will change when I get back to work though.

Is your advice to still keep the LISA and continue with the current plan?

Thanks,

Joshua

eskbanker

You don't indicate how your surplus will change when you go back to work - are you suggesting you'll have more or less?  Anyway, yes, I'd still see raiding the LISA as a last resort, so even if your debt repayment slows down a bit in future months it sounds like it's all under control....

JJM236

Less, will have to pay for commuting etc.

Really appreciate all of your help, the though of withdrawing the LISA and just being debt free was tempting.

eskbanker

JJM236 said:

Less, will have to pay for commuting etc.

Really appreciate all of your help, the though of withdrawing the LISA and just being debt free was tempting.

Even if your extra work-related costs are £500 a month, you should still be able to clear the debt by the end of the year without disturbing your LISA, and can then concentrate on using up the rest of your £4K 2020/21 LISA allowance before the tax year change in April!