Saving for a first home can be a challenge for anyone - even couples with an above-average income.
On average, UK home buyers today require a 14% or more deposit to secure a mortgage. This means that a £125,000 house or flat will need more than £17,500, while in the south east, where first house purchases are higher, the average first home price of £276,773 will require an 18% deposit of £50,144. It’s easy to feel intimidated by the idea of saving enough for a mortgage, but a range of savings schemes are available which have been designed to take some of the pain out of getting enough money together for a deposit.
One of these schemes is the Lifetime ISA, launched in mid-2017, which was set up with first-time home buyers in mind. Lifetime ISAs - or LISAs - faced uncertainty from the media when they were introduced, but they have since gained enormous popularity.
So, what is a Lifetime ISA? And exactly how valuable can it be for someone saving for their first home?
How a Lifetime ISA works
A Lifetime ISA offers 18-39 year olds the chance to save money for either a first home or an additional nest egg, but the real advantage it presents is to those saving for a property. The Government will add 25% to whatever you save, and you can invest up to £4,000 per year. This would mean a bonus of up to £1,000 per year, plus any extra benefits of your specific ISA.
If you decide to open a Lifetime ISA, you can usually transfer money over from other ISAs, if you wish.
To be eligible, you must be saving for your first home. The property you buy can be worth up to £450,000 and must be for you to live in, not for a buy-to-let or a buy-to-sell scenario. The ISA must also be open for at least 12 months before you can withdraw from it to buy your first home.
When you reach 50, you won’t be able to continue to save with the ISA and it will no longer earn you the 25% bonus; however, it will continue to gain interest or investment returns. Just remember that if you need to withdraw your money before you turn 60, and it isn’t for a first home or due to a diagnosis of terminal illness, the Government will charge you a 25% penalty. This means that you will lose more than the 25% government bonuses that you have been receiving since starting to save.
While a Lifetime ISA can supplement your retirement, it should not be used to replace a pension.
First questions to ask about your first home
Let’s look at a specific (fictional) example of a situation where a Lifetime ISA might help a couple to save for their first home.
Imagine a couple, Terry and Michelle, two police officers both aged 35, who are fed up with renting and want to save for a small house.
Anyone who decides they want to save for their first home should ask themselves a list of questions about the kind of property they want, the location, how much they are realistically able to save and how strong their credit score is.
Terry and Michelle’s questions might include:
- Where do we want to live?
- What amenities do we need to have nearby?
- Do we want a new build, an established property, or one that we can “fix up”?
- How big do we want the property to be?
- What size mortgage can we get?
- What size deposit do we need?
- How long will it take us to save that figure?
Answering these questions will help the couple to determine their starting point, and the goal they are aiming for.
Is a Lifetime ISA right for Terry and Michelle - or for you?
Terry and Michelle decide the kind of property they want is a house worth about £300,000 in the south-east of England, so next they need to decide how much their deposit is likely to be and how they are going to save for it.
Few first time buyers are able to afford a large deposit, so Terry and Michelle are probably going to need a 90-95% mortgage. As a couple, if they were to start saving with a Lifetime ISA and were each putting away the maximum of £4,000 per year, they will have saved their £30,000 deposit for a 90% mortgage in just 3 years.
The average first time buyer deposit in the UK is £33,000. Saving at the maximum of £4,000 per year means that, once government bonuses have been added on, a single person saving with a Lifetime ISA will take a little more than 6 years to achieve the target, and a couple saving with a Lifetime ISA each will take just over than 3 years. If you want to save quicker and can afford it you could take up the Lifetime ISA and combine it with another saving plan such as a monthly saving ISA.
The flexibility of a Lifetime ISA
A Lifetime ISA is often a long-term investment. Even if you decide not to use the money to buy a property, you can continue saving until you are 50 years old, and then take the money out when you reach 60 without suffering a penalty.
If Michelle and Terry decided against putting the money towards a property and waited until they were both 60 to take the money out, they would still have saved a total of £150,000 plus interest between them with their Lifetime ISA. While there may be ways to save a greater amount for retirement using other pension schemes, £150,000 is still an excellent nest egg.
Like any saving or investment scheme, the suitability of the plan will depend on your unique circumstances. You will need to research the schemes available to find the best plan for your salary and lifestyle.