If you are saving for a your first home the Lifetime ISA offers a 25% bonus on top of your own deposits. Here’s everything you need to know about the first-time buyer savings scheme
It might sound alarming, but a typical first-time buyer in the UK is currently putting down around £50,000 for the deposit on their first home.
This is based on someone saving the average deposit, which, according to UK Finance, is 23% of a property’s full value.
For many fledgling buyers, the thought of stumping up a quarter of a home’s value might seem unrealistic. But even those people who put down a 10% deposit will need £23,000 to buy an average priced property in the UK and this figure would soar to £45,000 and beyond in London.
So, if someone offered to give you 25% on top of whatever you have saved towards your home, you would probably bite their hand off to obtain this free cash.
But this is precisely what the Lifetime ISA offers savers who are squirrelling away cash for their move onto the property ladder.
Would-be home buyers between the ages of 18 and 40 can open one of these accounts, which pay tax-free interest – in line with the ISA model – but have the added benefit of a 25% government bonus.
Benefits of a Lifetime ISA
The bonus will not only bolster your house buying fund, but it will also help cut down the time it takes to achieve your savings goal.
In any tax-year savers with a Lifetime ISA can save £4,000. This means there is the potential if you save the full allowance to get £1,000 from the government each year. This will be paid until you reach 50.
Laura Suter, a personal finance analyst at investment platform, AJ Bell, said: “Using the government’s bonus schemes when saving to buy a house can shave years off the time it will take to save for your deposit, and save you thousands of pounds.”
She calculated if you put £4,000 a year into a normal savings account it would take you 12-and-a-half years to assemble a £50,000 house deposit.
But, using a Lifetime ISA, you would accrue £50,000 in 10 years – thereby shaving off more than two years of your saving time.
If you are buying with a partner or friend, you could both save £4,000 a year in a Lifetime ISA, and it would take five years to achieve the £50,000 deposit.
Some things to consider…
Before you go ahead and open a Lifetime ISA there are a few things you will need to think about.
Do you have a Help to Buy ISA?
In November last year, another tax-free savings scheme with a government bonus, the Help to Buy ISA, closed to new customers.
If you were lucky enough to open one of these accounts before it was axed, you can still use it to save for your first home.
However, you may be wondering if it’s worth transferring the money held in this account to a Lifetime ISA.
Suter said there was no clear answer to this as it depended on what you are using the account for, when you want to buy your home, how much money you have and how you like to save.
“The biggest thing to get right first is to make sure you’re getting the best return possible on whichever account you pick, and that you’re maximising the free government money,” she said.
You might be better of switching to a Lifetime ISA if you are a big saver and plan to put away more than £2,400 a year.
The Help to Buy ISA allowed savers to stash up to £200 a month plus an extra £1,200 in the first month of opening the account. The LISA, meanwhile, allows £4,000 a year which is around £333 a month.
The bonus potential is also higher with the Lifetime ISA because the handout is not limited to the first £12,000 saved, like the Help to Buy ISA.
However, if you are planning to buy your home in the next 12 months, Suter advises sticking with your Help to Buy ISA. The Lifetime ISA requires you have the account open for 12 months before you can use the money to buy your first home.
Interest rates
Interest rates on cash Lifetime ISAs are not as healthy as their Help to Buy counterparts. While the best rate on a LISA is Moneybox’s 1.4% offering, the top Help to Buy ISA rate is currently 2.58% from Barclays.
If you want to maximise your Lifetime ISA interest, you could consider investing in a stocks and shares version. This will mean your money is invested in funds, shares, investment trusts or ready-made portfolios.
The value of these can go up or down, so they are more risky over the short term. Therefore it might be wise to get financial advice before proceeding with this route.
You can visit the Moneyfacts.co.uk website to see the full range of cash Lifetime ISAs on the market.
Age limits
As mentioned before, you need to be over 18 to open a Lifetime ISA and the account must be opened before your 40th birthday. You can continue paying into the account after this time and will receive the government bonus until you are 50.
You can also use the Lifetime ISA as a way to save for your pension. However, if you decide to cash it in before retirement or before buying your first home there is a large penalty.
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