Acouple of times during the past week, I've heard people questioning the benefit of putting money in a cash ISA, saying they don't see the point when savings interest rates are so low. It's not surprising that some people have this mindset, particularly as the combined impact of low interest rates and high inflation has seen consumers struggle to maintain the spending power of their savings over the last couple of years.
It's easy to see why some may dismiss an ISA as hardly worth the effort, with a basic rate taxpayer currently better off to the tune of £34.97 per year based on the maximum cash sum of £5,640 at the best instant access ISA rate of 3.1 per cent.
If you break this down, then you'll have an extra £2.91 per month in your pocket rather than in the coffers of HMRC, which doesn't sound a great deal. But it's worth considering the cumulative effect of long-term ISA saving.
For example, if you were to save £5,640 every year for the next 10 years, and assuming that rates stays at a conservative 3.1 per cent, you will have earned £9,617 in interest over that time and saved yourself £1,923 in tax – you'll also have built up a capital sum of £56,400 in the process.
The benefits for a higher rate tax payer are even more compelling, as a 40 per cent tax payer will save £69.94 in year one and over a 10-year term will have prevented the taxman getting his hands on £3,847 of his interest.
Hopefully these numbers illustrate that putting your cash savings in an ISA is worth the effort, even if the initial savings aren't that exciting – it's all about taking a longer term view.
Looking at the new ISA deals launched this week, Barclays is offering 3.05 per cent to existing customers with its new Loyalty Reward ISA, although as has been the case in the last couple of years, the account is only for new ISA money and doesn'tpermit the transfer in of existing ISA balances. For non-customers, the rate is a fairly mediocre 2.75 per cent AER via ISA Saver Issue 2, especially when you consider there more than 10 instant access ISAs paying 3 per cent AER or above.
If you are looking for a fixed rate ISA, Yorkshire and Clydesdale Banks have just launched two new accounts. Both are very competitively priced with a two-year option paying 3.6 per cent AER and five-year fix 4.25 per cent AER. A transfer in of previous-year ISA balances is permitted, and interest is paid annually.
An extra 5 per cent deposit can be rewarding
Increased competition in a flat housing market has seen lenders turn to 85 per cent, 90 per cent and 95 per cent loan to value (LTV) mortgages.
However, the interest rate differential between a 90 per cent and 95 per cent LTV mortgage is quite alarming. If you take a scenario where a buyer is looking to buy a home valued at £120,000, a 95 per cent LTV mortgage means saving £6,000 as a deposit whereas a 90 per cent deal requires a £12,000 stake.
Putting aside an extra £6,000 may seem almost impossible, but those who do can reap handsome rewards. The best, five-year, fixed-rate mortgage at 95 per cent LTV comes with a rate of 5.99 per cent and £195 fee from Skipton Building Society. The £114,000 mortgage in this example involves monthly repayments of £733.81, and over five years will set you back £44,223.60.
A 10 per cent deposit can get a 90 per cent LTV mortgage with First Direct at 4.99 per cent and no fee, with monthly repayments of £630.73 and a £37,843.80 outlay during the five-year fix.
So an extra 5 per cent deposit means you save over £100 on monthly repayments, and pay out £6,380 less during a five-year term.
Andrew Hagger – Moneynet.co.uk