As savings rates fall, could a stocks and shares ISA offer you better returns?
Many savers are looking to stocks and shares ISAs as a way to boost their returns, as savings rates plummet to some of the worst rates seen in history. The average five-year fixed rate bond has seen a rate cut of 0.61% since the start of the year and this declining trend looks set to continue. While inflation at 0.5% is at its lowest rate for four years, many savings accounts still fail to generate a real cash return today. Given the greatest downward pressure on inflation was the fall in prices of fuel and recreational goods as a result of the Coronavirus lockdown, this figure could be set to rise as the economy starts to open up. The current top five-year fixed rate bond is from Bank of London and The Middle East (BLME), offering a 1.60% expected profit rate; with inflation having been at 1.8% in January of this year, this could in the future fail to deliver savers a return in real cash terms.
This scenario of low savings rates and the risk of locking into accounts that could fail to beat inflation in the medium-term makes the risk of loss of capital that exists with a stocks and shares ISA one that more savers might be prepared to take in exchange for better returns.
Those who are starting out in investments will most likely find stocks and shares ISAs to be their first port of call. They are easily accessible through fund managers and the funds can be completely managed on behalf of the investor.
How to find the best stocks and shares ISA
There is a range of different types of organisations offering stocks and shares ISAs. Investors may prefer to invest ethically through a mutual organisation such as Foresters Friendly Society or seek an investment platform that has a wide range of funds available such as AJ Bell or Interactive Investor.
For those with larger lump sums to invest, then diversification of the investment becomes more important. This means looking for an investment platform that allows many different funds from many different fund providers. A greater choice of funds allows investors to spread their investment across a range of different asset types and across different geographies, thereby spreading their risk.
Some investment platforms may restrict investors to a handful of funds, while going direct to a provider may limit investors to only the provider’s funds. In this case, it is important that the investor can balance their acceptable level of risk to the funds available.
Investors can compare stocks and shares ISAs in our chart, which includes over 83 providers, all with a range of different investment funds. Alternatively, investors can speak to an independent financial adviser first to advise the best options.
There’s a lot more to this story online, including advice on how to transfer across from another type of ISA and how you can withdraw your money, if required. Read all of this story online or take a look at our stocks and shares ISA comparison charts to find the best deal for you.
Product Spotlight: Five-year fixed rate ISAs
ISAs enable you to take advantage of your tax-free cash ISA allowance and a five-year term gives your money plenty of time to grow.
• UBL UK sits at the top of our chart with its 5 Year Fixed Rate Cash ISA offering an interest rate of 1.21% AER on a minimum deposit of £2,000, with a choice of interest options paid on the anniversary of opening, quarterly, on maturity or monthly. Early access is on closure only and is subject to 365 days’ loss of interest. Transfers-in from cash ISAs are also permitted. The ISA must be opened by post or in branch and operated afterwards by post.
• Shawbrook Bank takes second place with its 5 Year Fixed Rate Cash ISA Bond Issue 25 with an interest rate of 1.10% AER paid on the anniversary of opening for a minimum deposit of £1,000,. For those looking for a regular income, there is an option paying interest monthly at a slightly lower rate. In addition, this ISA welcomes further additions while the issue remains open. Withdrawals are permitted but early access is subject to a loss of 360 days’ interest. Transfers-in from cash ISAs and stocks and shares ISAs are permitted. Once opened online, this ISA can also be managed by phone.
• Next up is Metro Bank with its 5 Year Fixed Rate Cash ISA (Issue 11), which offers a return of 1.10% AER, paid yearly, on a minimum investment of just £1. Further additions are permitted within 30 days of opening the account, while early access is only allowed on closure and is subject to 180 days’ loss of interest. Transfers-in from both cash and stocks and shares ISAs are welcome within the first 30 days of the account opening. This ISA must be opened in branch but afterwards can be operated online, in branch and by phone.
Top products – At a glance
Over half of all mortgages are available to borrowers aged 55+
Of all residential mortgage deals available, over half are open to borrowers aged 55 or over at application and have a maximum age of 75 or above at end of the mortgage term.
Research carried out by Moneyfacts.co.uk found that there are 1,541 are available to borrowers who are aged 55 or over and have a maximum age at end of the mortgage of at least 75. However, just 147 of these mortgages are specifically marketed towards those past pension age, with just 147 deals available at a minimum age of 55.
Those looking for deals that have a maximum age of 80 or over may be better off focusing on deals specifically aimed at later life borrowers. Borrowers aged 55 or over and who are looking for a deal that goes beyond the maximum age of 80 can get a later life mortgage from Tipton & Coseley Building Society that offers 2.95% (4.6% APRC) fixed until 30 June 2023, and this deal has a maximum age of 90.
As well as providing a higher maximum age limit, some later life mortgages provide the option of interest-only deals. When choosing a later life interest-only mortgage, borrowers should be aware that they will have to pay the mortgage off after an agreed time period. Alternatively, borrowers could consider a retirement interest-only mortgage (RIO), in which the mortgage is not repaid until it is sold after the borrower dies or goes into permanent long-term care.
Retired homeowners can also consider equity release, which will enable them to unlock wealth in their property. Homeowners considering this should be aware that equity release comes with risks and, although the loan does not have to be paid back until after the borrower dies or goes into long-term care, interest can accumulate, meaning it can significantly impact inheritance left behind.
Read this story in full online or take a look at our helpful Home reversion plans versus lifetime mortgages guide.
Product Spotlight: Three-year fixed rate buy-to-let mortgages
Landlords looking to purchase or remortgage may be interested in the selection of 60% loan-to-value (LTV) buy-to-let mortgages featured below:
• Virgin Money is offering a buy-to-let mortgage with a rate of 1.56% (4.1% APRC) fixed to 1 September 2023, before reverting to a rate of 4.54% variable for the remainder of the term. This mortgage is available to second-time buyers and remortgagers only. There is no minimum loan and the maximum is dependent on LTV. The product fee is £1,995 and this mortgage benefits from free valuation and £250 cashback for house purchasers. Remortgagers can choose between £300 cashback or free legal fees. Overpayments and payments holidays are also permitted. Lastly, applicants must be a maximum of 85 years old at the end of the mortgage term.
• TSB offers two buy-to-let mortgages that both offer a rate of 1.64% (4.0% APRC) fixed to 30 September 2023, which then revert to a variable rate of 4.44% thereafter. One is suitable for second-time buyers and the other for remortgagers. Both mortgages have a loan minimum of £25,005 and a maximum of £500,000, with an arrangement fee of £995. The deal for second-time buyers includes the benefits of free valuation and £250 cashback, while the remortgage option has the incentives of free valuation and free legal fees. Applicants must be a maximum of 75 years old at the end of the mortgage term.
• Finally, Accord Mortgages has a buy-to-let mortgage with a rate of 1.69% (4.1% APRC) fixed to 30 September 2023. This reverts to a rate of 4.49% variable thereafter for the remainder of the term. This mortgage is available to second-time buyers only who require a minimum loan of £50,000. It has a completion fee of £1,495 and benefits from an incentives package that includes free valuation and £250 cashback. Applicants must be a maximum of 85 years old at the end of the term.
Rep example: £178,000 mortgage over 25 years initially at 1.69% fixed for 38 months reverting to 4.34% variable for 46 months and 4.09% variable for term. 38 monthly payments of £727.89, 46 monthly payments of £942.44 and 216 monthly payments of £924.03. Total amount payable £271,967.54 includes loan amount, interest of £92,603, valuation fees of £0 and product fees of £995. The overall cost for comparison is 3.6% APRC representative.
How best to pay off your credit card debt
According to recent Moneyfacts data, the average balance transfer is just over £8,000. While moving an outstanding debt to a 0% interest balance transfer card makes a lot of sense, consumers often forget that they must pay off the whole amount before any introductory interest-free period comes to an end to avoid more costly interest rates.
Currently, the longest interest-free introductory period is 30 months with the TSB Platinum Balance Transfer Card Mastercard. With a fee of 2.95%, a balance transfer of £8,000 would cost an extra £236, leaving a debt of £8,236. To clear this within the interest-free period, consumers would need to pay £275 every month – a sum that some people may find it hard to manage.
An option for those who can’t afford this is the debt consolidation loan. This has the advantage of being able to offer much longer terms than the best 0% interest balance transfer cards. The Moneyfacts personal loan comparison chart shows that a Cahoot Online personal loan, taken over a 48-month term at an APR of 2.8%, would reduce this to just £176.24 per month with a total repayable amount of £8,459.52.
While this is £223.52 more than the total cost of the balance transfer option, it’s worth remembering that if the debt is not cleared in the 30-month period, the credit card option above would start to charge interest at the much higher representative rate of 19.9% APR variable.
To find out more about the potential savings of debt consolidation, see our personal loan and 0% balance transfer comparison charts. For those worried about passing a credit check, then a pre-approved personal loan through our partner broker, Loans warehouse, could be the answer.
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