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6 essentials aspiring homeowners need to know about Lifetime ISAs

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Lifetime ISAs (LISAs) could boost the deposit of first-time buyers, and help you get on the property ladder sooner. However, figures show that LISA withdrawal charges are on the rise, so read on to discover what you need to know before you start saving.

The government introduced LISAs in 2017 to help aspiring homeowners save the deposit they need. According to AJ Bell, in the first five years, more than 775,000 people opened a LISA.

Rising property prices mean saving a deposit is the first challenge many first-time buyers face. According to Zoopla, the average deposit paid by a first-time buyer for a three-bed home in 2023 is £34,500. Of course, the average deposit varies significantly across the country – first-time buyers in London have an average deposit of £63,750.

Saving a deposit could take years, so the boost a LISA provides could make sense. However, there are six essential things you need to know first.

1. You must be aged between 18 and 39 to open a LISA

The government launched LISAs to support first-time buyers. However, the age restrictions mean some aspiring homeowners may not be eligible to open a LISA.

To open a LISA, you must be aged between 18 and 39. However, once you’ve opened a LISA, you can continue to contribute to it until you’re 50.

2. You can deposit £4,000 each tax year into a LISA

The annual ISA allowance is £20,000 in the 2023/24 tax year. However, the maximum amount you can place in a LISA is £4,000. You’ll also receive a 25% government bonus on your deposits.

So, if you contribute the maximum amount in 2023/24, you’d receive a boost of £1,000. Assuming the limit remains the same, if you used your full allowance from the age of 18 to 50, you could benefit from a total bonus of £33,000.

3. You can choose a Cash LISA or a Stocks and Shares LISA

As with a traditional ISA, you can choose between a Cash LISA, where your savings would earn interest, or a Stocks and Shares LISA, where your contributions would be invested.

There are pros and cons to each option, and it’s important to consider your goals when deciding which is right for you.

If you choose a Cash LISA, your money is secure – the amount held in the account won’t fall. However, in real terms, the value of your savings may decrease as inflation is likely to be higher than the interest rate offered. Over the long term, this could significantly reduce the value of your savings.

With a Stocks and Shares LISA, there is an opportunity for your contributions to grow in real terms through investment returns. But your money would be exposed to investment volatility and risk, which may mean the value falls. Due to volatility, investing with a long-term time frame often makes sense.

Before you decide whether to choose a Cash LISA or a Stocks and Shares LISA, you may want to consider your timeline for buying a home and your attitude to investment risk.

You may choose to have both a Cash LISA and a Stocks and Shares LISA. However, you can only open one LISA each tax year, you can only pay into one LISA each tax year too.

4. You should be mindful of LISA restrictions

There are some restrictions around how you can use the money held in a LISA when buying a home without facing a charge. This could mean LISAs are not the right option for some first-time buyers.

You can use the money saved in a LISA to buy a home worth up to £450,000. You must also use a mortgage to buy a property – you cannot be a cash buyer without paying a penalty. In addition, you cannot use the deposit from a LISA to purchase a property using a buy-to-let mortgage.

Your LISA must also be open for at least a year before you purchase a home.

5. You could face a charge when making a withdrawal from your LISA

You cannot make a withdrawal from a LISA for a purpose other than buying your first home before the age of 60 without facing a withdrawal penalty, unless you are terminally ill.

The penalty is 25%. So, you’d lose the government bonus and some of your own savings. For example, if you deposited £1,000 in a LISA, you’d receive a bonus of £250. If you then wanted to withdraw that £1,250 for a purpose other than buying your first home before you’re 60, the 25% withdrawal penalty would be £312.50.

A report in FTAdviser suggests the number of people affected by the LISA penalty is on the rise. In 2022/23, the total charged increased to £47.2 million – 53% higher than a year earlier.

So, before saving into a LISA, set out what your goals are. Having another source of savings that you could draw on in an emergency might also reduce the risk of paying a penalty.

6. You can continue saving with a LISA after buying your first home

A LISA isn’t just for saving for your first home. The government also hopes it will encourage people to save for their retirement.

Keep in mind that if you want to use a LISA to save for retirement you must open an account before you’re 40, and you can only make contributions until you’re 50. In addition, you couldn’t withdraw money from the LISA before you’re 60 without paying a penalty, which may not align with your retirement plans.

While you’d receive a 25% bonus on money you deposit into a LISA, it’s important to consider your other options. Depending on your circumstances, saving for retirement through a pension could help your money to potentially go further.

Want to learn more about your mortgage options?

If you’re ready to buy a home and want to discuss your mortgage options, we can help. As a first-time buyer, it can be difficult to navigate the mortgage and homebuying process, so working with a professional could make it less stressful. Contact us to arrange a meeting.

 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 investment 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.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

6 essentials aspiring homeowners need to know about Lifetime ISAs

Approved by The Openwork Partnership on 08/08/2023.