Using LISA savings to pay off debt

dazedandconfused123

Good morning,

I have previously asked this question, however, as the fine for withdrawing LISA savings has changed I was wondering if the advice has changed.

I have £8,013.87 in a Moneybox Cash LISA. I have the following debts:
- £13,838 First Direct loan (£553.52 minimum payment). I planned to pay this off at £1,383 a month once the MBNA credit card (below) is paid off;
- £3,063.27 MBNA credit card (0% interest until April 2022). I planned to pay this off by December 2020 at £726.45 per month; and
- £1,011.98 Virgin credit card (20.01% interest). I make minimum payments at the moment (1% of balance or £25).
Currently, I pay £333 a month into my LISA. I take home £3045.05 a month and my essentials/bills are around £1,000.

Is it worth withdrawing the money from my LISA, stopping my savings payments for a while and throwing that approx £6k and my spare money at debt? I have no kids and I'm not in a rush to buy a house, but it is something that I would like to do in my early 30s (I'm 28).

I have addressed the reasons why I'm in debt (instant gratification) and am focused on home ownership and building my personal wealth. 

Also, if I were to close my LISA, would I be able to open another cash LISA once I was ready to start saving again?

Thanks in advance for any responses

greensalad

I think it is quite sensible but you have to know that you're not going to run up debt again. You have to address those issues. When was the last time you made a purchase on credit? If you haven't learnt your lesson, you'll repeat it.

If you have learnt your lesson... I would crunch the numbers to see how long away you are from paying off your debts without touching the LISA. If you do a snowball calculator, one for no LISA withdrawal and one with, what is the difference? How much interest would you save pulling the LISA? Is it worth more than the bonuses you've received? How much will it make a difference by? I'd want to know what tangible effect pulling the LISA really had on my DFD so I could assess whether I want to do that now or forge along. 

I say this as someone in a similar situation. I have debts (about £8k) that I'm trying to clear whilst also saving for a house through a LISA. But I'm comfortable that my credit is all interest-free, and that I'll have it paid off before I buy a house so it's more economically sensible for me to pay into the LISA for the bonus. 

If you're going to be putting £2,045.05 per month into debt repayment you'll pay off that Virgin credit card in one month and still have a grand leftover.

Why keep the loan which presumably has interest until you've paid off your MBNA, which is 0% for almost 18 months?

I think you need to visit whatsthecost and snowball to come up with a more effective plan of repayments. http://www.whatsthecost.com/snowball.aspx

ryanm8655

Why are you paying the card on 0% interest off at £700/month but paying minimum on the card with 20% interest? Or is that an error and they were meant to be the other way around?

What's the interest rate on the loan?

Personally I would leave things as they are. You're clearing the debt at a good rate and while you could build the LISA up again quickly, you won't get the 25% bonus on more than £4k per year. Potentially I'd stop paying the £333 per month to the LISA while you clear the debts and then hit it hard in the lead up to April once the non 0% debts are cleared.

My plan would be:
1) cancel LISA DD and divert to virgin
2) Divert MBNA to Virgin 
Then your Virgin card will be gone in a month...
Then I'd prioritise the loan over the MBNA while it's on 0%.

dazedandconfused123

Thank you @greensalad and good luck with your debt free journey! I should clarify that First Direct adds interest upfront and from reading my contract and this forum, I believe that the interest isn't reduced by overpayments.

I'm willing to put £1,304.97 (£1,637.97 if I stop saving £333 pm) towards my debts. Using the debt free snowball calculator:
- Without the LISA withdrawal my debts would be paid off by October 2021 and I'd have approx £14,488.37 in my LISA. By March 2022 I'd have £22,678.22 in savings; and
- Withdrawing my LISA would mean that my debt is paid off by March 2021 and I'd have £0 savings. I'd then put all of my debt repayment money into savings. By March 2022 I'd have £20,655.64 in savings.

I guess that 8 months isn't that long in the grand scheme of things, but I think that it's more the psychological aspect of getting out of debt ASAP and no longer having it on my shoulders. If I withdrew my LISA, I could top up my savings by the 'missing' £2,022.58 through work bonuses (these are discretionary, but usually only not paid if you're seriously underperforming) and I plan to start looking for a new job next April (I work in London Market insurance compliance, so even though I know that we are in a recession my skillset is in demand especially with Brexit).

I've 100% addressed my issues with debt and no longer use credit.

greensalad

dazedandconfused123 said:

guess that 8 months isn't that long in the grand scheme of things, but I think that it's more the psychological aspect of getting out of debt ASAP and no longer having it on my shoulders. If I withdrew my LISA, I could top up my savings by the 'missing' £2,022.58 through work bonuses (these are discretionary, but usually only not paid if you're seriously underperforming) and I plan to start looking for a new job next April (I work in London Market insurance compliance, so even though I know that we are in a recession my skillset is in demand especially with Brexit).

Yep, this is exactly where I got to! Do I pay off all my debt so I can just be "free" of it, or do I keep saving and pay off debt simultaneously, and be a few months behind? 

Ultimately I decided to go with the latter. We'll have £42,500 to buy a house next Autumn but we'll still have credit card debt, but it'll be really small. I did however adjust plans to personally pay off my own credit card, simply because I wanted to pay it off before I turn 30 so I am "debt free" (my boyfriend's CC is a shared goal to pay off). 

Honestly it's really up to you. You could make a goal to have paid off one of your cards and be happy when you get there. 

MovingForwards

Keep your money in the LISA, worst case it's an emergency fund.

Stop paying into the LISA, snowball the debts; highest interest rate first or lowest balance first to see an impact.

I picked my debts off by dealing with lowest balance first and I saved at the same time. Difference is, mine were historic and therefore no interest, just the CRA damage.

kangoora

You appear to be forgetting the tax-free bonus on the LISA when you buy your first house, assuming you pay the max into the LISA each year.

- Without the LISA withdrawal my debts would be paid off by October 2021 and I'd have approx £14,488.37 in my LISA. By March 2022 I'd have £22,678.22 in savings; and
- Withdrawing my LISA would mean that my debt is paid off by March 2021 and I'd have £0 savings. I'd then put all of my debt repayment money into savings. By March 2022 I'd have £20,655.64 in savings.

Using the second method you'd have £20.6k in svaing but as you have only contributed this over 1 year you'd only be able to claim £1k in government cash (max of £4k/year x 25%) so you'd have £21.6k towards your deposit

Using the first method you could have up to 5 years contributions of £4k/year and thus giving you 5 x £1k bonus so you could have £27.6k towards your first home deposit.

Plug in your exact figures for amounts saved and over how many years for an exact amount.

Looks to me like you will be majorly better off leaving your LISA where it is and hitting your debts hard.

lopsyfa

dazedandconfused123 said:

Thank you @greensalad and good luck with your debt free journey! I should clarify that First Direct adds interest upfront and from reading my contract and this forum, I believe that the interest isn't reduced by overpayments.

Front loaded interests are banned in the UK. Any overpayment you make will still reduce your overall interest. The balance displayed is only an indication to show how much you will pay if you follow the loan schedule without any overpayment or holiday. First direct won't apply the interest reduction immediately to reduce the balance displayed. The interest saving is resolved once the loan account is settled.

If I were you, I will prioritize paying the Virgin loan and then pay equal amount monthly into the other credit card so that it is paid up by the time the 0% period finished. Throw any extra payments at the first direct loan and leave the LISA.

Even though the LISA deduction is now 20% not 25%, it will still be a loss to you once you come to buy your first home. That will be more than any interest savings. You can pause the payments though while paying the off the credit cards. You have until April next year to fill the missing payments. 

All the best.