If you or someone you know is saving a deposit to buy a first home, a Lifetime ISA (LISA) could be the key to reaching the milestone sooner. Yet, research suggests it’s a tool that many first-time buyers are overlooking.
A survey reported by the FTAdviser found that, on average, first-time buyers with a LISA purchase a property four years earlier, at the age of 29, than those who didn’t use the tax-efficient savings account.
Despite a LISA potentially boosting their property deposit, just 1 in 6 first-time buyers are opting to open one.
Read on to find out why a LISA could make saving a deposit quicker, and some of the restrictions you might need to consider before opening an account.
You could receive a bonus of up to £1,000 each tax year by using a Lifetime ISA
The key benefit of using a LISA is that you receive a 25% government bonus on your deposits. In the 2024/25 tax year, you can add up to £4,000 to a LISA. So, if you contribute the full amount, you’d receive £1,000 from the government to put towards buying your first home.
Traditionally, you would need a 10% deposit to purchase a home, but there are now mortgages available that allow for a 5% deposit.
According to the Halifax House Price Index, the average property in April 2024 was valued at almost £290,000. As a result, first-time buyers might anticipate needing between £14,500 and £29,000 to act as a deposit.
It’s important to note that property prices vary significantly across the UK. Checking your local area could help you set a savings goal that suits your needs. In addition, putting down more than 10% when buying a home could give you access to more mortgages and a better interest rate.
The deposit first-time buyers need to save can seem intimidating, but the LISA bonus could go some way to helping you reach your target amount.
Your Lifetime ISA deposits could also benefit from interest or returns
As well as receiving a government bonus, the money held in your LISA could also benefit from interest or returns that may help you take a step closer to homeownership sooner.
If you choose a Cash LISA, your money, including the bonus, would be held in cash and you’d receive interest on your savings. As interest rates have increased recently, shopping around could help you get more out of your money.
Alternatively, you can opt for a Stocks and Shares LISA, where your money would be invested.
Investment returns have the potential to be higher than interest rates. However, there is also a risk – the value of your savings could fall. Typically, you should invest with a long-term time frame of at least five years. This provides a chance for the ups and downs of the investment market to smooth out.
When you’re deciding between a Cash LISA and a Stocks and Shares LISA, you might want to consider your buying time frame and how much risk you’re comfortable with.
As with other types of ISA, a LISA is tax-efficient – you won’t be liable for tax on the interest or returns you receive on assets held in a LISA.
4 Lifetime ISA restrictions you need to know before opening an account
While a LISA could be a valuable way to boost your property deposit, some restrictions might be important to understand before you rush to open an account.
1. You must be aged between 18 and 39
To open a LISA, you must be aged between 18 and 39. However, once you’ve opened a LISA, you can continue to make contributions until the age of 50.
2. You could face a withdrawal penalty if you access the money and don’t use it to buy a first home
It’s important to consider your goals when deciding where to save your money to avoid potentially paying a penalty.
If you access the money you hold in a LISA for a purpose other than buying your first home before the age of 60, you will usually be charged a 25% fee. This means you’d lose the government bonus and a portion of your own savings.
For instance, if you added £1,000 to a LISA, you’d receive a bonus of £250. If you then decide to withdraw the £1,250 before you’re 60, the 25% penalty would be £312.50. So, you’d receive £937.50 – less than the amount you originally contributed to the LISA.
Before you add money to a LISA, being sure that you intend to use the money to buy a first home or to fund retirement could be useful.
3. Your Lifetime ISA must be open for a year before buying your first home
If you plan to purchase your first home within the next year, a LISA might not be right for you – your account will need to be opened for at least a year to be able to use it, and the government bonus, as a deposit for your first home.
4. You must purchase a property in the UK that costs £450,000 or less
To receive the LISA bonus, you must purchase a residential UK property with a mortgage. You will not receive the bonus if you’re a cash buyer, are purchasing a property overseas, or using a buy-to-let mortgage.
In addition, the property you buy cannot cost more than £450,000. While this limit may be enough for the majority of first-time buyers, those living in expensive areas could be caught out. For example, the Halifax data shows in April 2024, the average property price in London is almost £540,000. As a result, it might be useful to search the property market in the area you hope to buy to understand the average value of properties there.
We could help first-time buyers secure a mortgage
Taking out a mortgage for the first time can seem complicated – you might need to make a lot of decisions that will affect both your short- and long-term finances. As mortgage professionals, we could offer reliable guidance about which lenders suit your needs and provide support when you’re completing the mortgage application.
Please contact us if you’d like to talk about how we could help you or a loved one secure a mortgage to buy a first home.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
