An estimated £1 billion of funds, tied up in the government-supported accounts, are expected to be put towards home purchases over the next 12 months, according to analysis by mortgage broker Tembo.
It said there was £1.5 billion of savings invested in Lifetime ISAs (LISAs) in the UK and in 2022, over 50,000 first-time buyers withdrew a total of £670 million to put towards their first property.
Based on this trajectory, it believes £1 billion could be used as deposits for house purchases in 2023, which would help one in four people get on the property ladder.
Richard Dana, CEO of Tembo, said “While the LISA is still supported by the government, it is a scheme that is providing many first-time home buyers with a great opportunity to save towards their deposit.
“Having a larger deposit puts homebuyers in a stronger position to buy, particularly in the current market, where we are seeing a reduction in low deposit mortgages.
“So, hanging in there and continuing to save, even when it seems like such an uphill struggle, does seem to be paying off for thousands of first-time buyers.
“Many of the first-time buyers Tembo helped to buy a home this year have used the proceeds of their LISA to put towards their deposit.”
What is a Lifetime ISA?
The LISA was launched in 2017 as a way for people to save for either their first home or retirement. The savings scheme offers a 25% government bonus as well as the interest offered by the provider making it a productive method of saving.
An additional advantage is LISAs are individual savings accounts – so if you are buying with another person, you can use their savings and government bonus too.
Although you must open the account between the ages of 18 and 40, you can keep saving into an ISA until you reach 50.
What are the pitfalls of the LISA?
There are, however, restrictions – the most significant being the age limit. Indeed, the LISA can only be opened by those aged under 40.
Savers can put away up to £4,000 a year so the maximum bonus paid by the government is £1,000 per year.
The LISA can only be used as a deposit on properties worth £450,000 or less – this can mean many buying in areas of the UK where property prices are higher, such as London or the South East, may be exempt.
Finally, if you withdraw the money before you purchase your first home, you will pay a 25% charge – in other words, you will lose the government bonus.
Dana added: “With the average home costing seven times the average income, there is still a large affordability gap to fill for many home buyers, even when they reach the 5% deposit milestone.
“There are options for those who are struggling with affordability access, including family or friend supported mortgages, shared ownership or a range of emerging private help to buy schemes. Over 80% of the customers we help have been turned down by a mortgage broker or lender when they come to us, even when they have spent so long saving for a deposit.
“It is vital that would-be buyers know their options when setting out to buy their first home if they are to make their home-ownership dreams a reality.”
Find out more about all the first-time buyer savings schemes here.
