Is a Lifetime ISA the right place for you to save a property deposit?

Young people are finding it increasingly difficult to get on the property ladder, not least as they try to save a deposit. The Lifetime ISA (LISA) was introduced in 2016 with the aim of helping more aspiring homeowners pull together the money to buy a first home. However, statistics indicate that some people aren’t fully aware of the restrictions around LISAs and may be losing money as a result.

Whilst getting on the property ladder may not be an issue for you, it’s likely to be something that’s affecting someone close to you, such as children and grandchildren.

Rising house and rental prices

Over the last few decades, property and rental prices have steadily been climbing. As a result, many renters are struggling to keep up with monthly bills and set aside some money for a deposit. With mortgage providers typically requiring 5-10% of a property’s value to act as a deposit, it’s a sum that can add up to tens of thousands of pounds.

Therefore, it’s unsurprising that more young people are living at home. Data from the Office for National Statistics show the number of young adults living with parents has increased 24% in the last decade alone. One in four young adults lived with family last year. Whilst it may not be a situation that’s seen as ideal, it does afford the opportunity to increase money going towards a deposit.

One of the ways to help a deposit grow even quicker is the LISA, but there are drawbacks to consider first.

A Help to Buy ISA is another option to consider. However, this scheme is coming to an end. The last date you can open a Help to Buy ISA is 30 November 2019. If you already have a Help to Buy ISA, you’ll be able to continue making contributions for a further decade and the bonus must be claimed by 1 December 2030. As a result, a LISA may be the best option for you.

How does a LISA help?

First, a LISA has the same tax benefits as any other ISA (Individual Savings Account). This means interest or investment returns earned will not be liable for Income or Capital Gains Tax.

Second, you can choose whether to hold your deposit in a Cash LISA, where you’ll earn interest, or a Stocks and Shares LISA, where the money will be invested. This compares to a Help to Buy ISA where your deposit can be held in cash only. Whether the Cash or Stocks and Shares option is best for you will depend on your goals and timeframe.

Finally, the LISA offers you a 25% government bonus. This is added to your account at the end of each month and can be used as part of your deposit, helping you to reach your goals quicker.

At first glance, a LISA may seem like the obvious way to save for a house deposit. However, there are some restrictions to keep in mind before proceeding:

  • It is only available to first-time buyers purchasing a property that costs £450,000 or less
  • You must be aged between 18 and 40 to open a LISA; you can continue making contributions until you’re 50
  • You can add up to £4,000 to a LISA annually; as a result, the maximum bonus available is £1,000 a year
  • Your LISA must be open for a year before it can be used to purchase a home
  • If you withdraw money before the age of 60 for a purpose other than buying your first home, you will lose the bonus and some of your own contributions

The penalty for withdrawing from a LISA

It’s this last restriction that’s costing some first-time buyers.

The penalty for withdrawing money that won’t be used to buy your first home is 25% of the total value, this means you’ll lose the government bonus and more. As a result, you could get back less than you put in. Figures suggest it’s a trap that some have fallen into.

According to a Freedom of Information Request, £1.05 million was paid in penalties between April 2017 and April 2019.  More than 1,500 savers have been affected, losing an average of £695 each. If you’re already struggling to build a deposit, losing some of your LISA contributions could set you back even further.

So, is a LISA the right place to save for your first home?

There’s no single answer to this, it will depend on your home-buying plans. If you’re certain you want to purchase a house in the UK in a year or more, a LISA can really help boost your savings. However, keep in mind that dipping into a LISA can be costly. So, make sure you have other saving pots you can dip into if unexpected expenses crop up and consider if the LISA restrictions align with your home-buying plans first.