How a Lifetime ISA could make buying your first home more affordable

First-time buyers looking to get their foot on the property ladder face more challenges than ever before. In 2022, Halifax found the average cost of a home for a first-time buyer increased to £302,010, with the average deposit sitting at 21% of the purchase price – £62,470. And that was before the average two-year fixed-rate mortgage jumped to 6.47% (with a 10% deposit) In July 2023. In short, the dream of even getting a toe on the property ladder is being pushed further out of reach.

But that doesn’t mean there aren’t steps you can take towards saving for your dream home, help is at hand. For many, the Lifetime ISA (also referred to as a LISA) could be the only hope that allows young people to get enough money together to buy their first home.

When did the Lifetime ISA start and how does it work

The Lifetime ISA was designed for first-time buyers (as well as future retirees), allowing them to save up to £4,000 each tax year. It was introduced back in 2017 and is available to people between the ages of 18 and 39.

If you hold a Lifetime ISA (LISA), you can currently contribute up to £4,000 annually until you reach the age of 50. And here’s the best bit: the government will add a whopping 25% annual bonus to your contributions.

So, if you were to save a maximum of £4,000 per tax year, you could receive an annual government bonus of £1,000 to put towards purchasing your first home!

If you regularly saved until you reached 50, that extra 25% per year could give your house deposit or retirement fund a substantial boost.

Help to Buy ISA vs Lifetime ISA – what’s the difference?

You might have heard about the Help to Buy ISA, it was designed by the government to help would-be first-time buyers reach the same goal as a Lifetime ISA (LISA) to get a foot onto that first rung of the property ladder. It too provides a 25% government bonus.

However, the Help to Buy ISA closed to new applicants at the end of November 2019. Anyone who has already opened a Help to Buy ISA can continue to contribute into their account until November 2029.

The Amount You Can Save

You can save up to £4,000 per tax year with a Lifetime ISA, compared to £2,400 with a Help to Buy ISA.

The current rules also stipulate you can only pay into a Help to Buy ISA until 30 November 2029. With the Lifetime ISA, account holders can continue to save until their 50th birthday.

Government Bonuses

You’ll receive a 25% tax-free bonus on the amount you pay into your Lifetime ISA (LISA) of up to £1,000 a year. With a Help to Buy ISA, you’ll receive a 25% bonus on whatever your closing balance is – of up to £3,000. This is paid once you’ve completed the purchase of your first home.

So, if someone opened a Lifetime ISA at the age of 18, for example, and saved the maximum yearly amount until the age of 34 (the average age for a first-time buyer in 2021/22, according to uSwitch), there’s the potential to earn a government bonus of up to £16,000.

The maximum bonus you can receive from a Help to Buy ISA is capped at £3,000. And this must be claimed by 30 November 2030.

Couples using a Lifetime ISA to buy a house together benefit too

For couples, it’s even better. If you’re using a Lifetime ISA to buy your first home, your partner can also open a Lifetime ISA (LISA) to help save towards your deposit. This means you can benefit from two lots of government bonuses – doubling your savings efforts.

Once you’ve used your savings to buy your first property, you could continue saving into the Lifetime ISA, until your 50th birthday, to help secure your future during your retirement years and still receive the government bonus.

Can you have a Help to Buy ISA and a Lifetime ISA?

Yes, you can. But you can only use the government bonus from one of the accounts to purchase your first home.

You can transfer money from a Help to Buy ISA to a Lifetime ISA – provided it’s within the £4,000 annual LISA allowance however, if you transfer money from a Lifetime ISA (LISA) into a Help to Buy ISA you will have to pay the 25% withdrawal charge

What is the Lifetime ISA house price limit?

The LISA maximum house price limit is £450,000 or less. This price cap covers the full sale price for the whole property – not just the share you’re purchasing with someone else. And the property must be the first you’ve purchased.

How to get started with a Lifetime ISA to buy a house

Even if you have only the vaguest of plans to buy your first property at some point in the not-too-distant future, opening a Lifetime ISA to buy a house could be a suitable option for you.

Find out more about the Foresters Lifetime ISA and how we can help you save towards your first home or retirement

Tax rules may change and depend on individual circumstances. Contributions paid into a Foresters Friendly Lifetime ISA are invested in a fund which includes stocks and shares, the value of the plan may fall as well as rise and you may get back less than you have paid in.

The content of this article is for information purposes only and does not constitute financial advice. We do not offer financial advice. If you’re unsure as to the suitability of a product you should seek advice from a Financial Adviser. You may have to pay for this advice.