5 ways a Lifetime ISA could help you as a first-time buyer

ISA for first time buyers

With house prices at an all-time high, it’s arguably never seemed more difficult for first-time buyers to make a start towards homeownership.

Fortunately, there are products available that could help you get a foot on the property ladder. One of those products is the Lifetime ISA, also known as the “LISA”.

The Lifetime ISA is available for 18 to 39-year-olds and is specifically designed to help you save towards a first home.

Here are five ways a Lifetime ISA could help you as a first-time buyer.

1. Lifetime ISAs have an annual contribution limit of £4,000

In the 2020/21 tax year, Lifetime ISAs have an annual limit for contributions of £4,000. This could help give you a concrete and achievable savings goal for your money. Knowing how much you need to save and what you’re saving for can help you focus on exactly how to budget for it.

The £4,000 counts toward the £20,000 ISA allowance, so don’t forget to factor that into your budget plans if you have other ISAs.

2. Lifetime ISAs receive a 25% government bonus

For every contribution you make into a Lifetime ISA in each tax year, you’ll receive a 25% government bonus. In real terms, this is an extra £1 per every £4 you put in your Lifetime ISA. That means, for each year you make the maximum £4,000 Lifetime ISA contribution, you’ll receive £1,000 from the government.

You’ll receive the 25% bonus on any amount you put in, even if you don’t use the full limit in a tax year.

You can make contributions to a Lifetime ISA until you turn 50, so you could potentially receive a bonus of up to £33,000 if you made the maximum contribution from aged 18 to 50. This could be useful if you’re planning to rent for most of your working life, before buying for the first time at a later stage.

Bear in mind, you can only claim the bonus if you’re using to buy it a first house or you take it after the age of 60.

3. You can open either a Cash or Stocks and Shares Lifetime ISA – and all proceeds are tax free

Depending on your appetite for risk, you can open either a Cash or a Stocks and Shares Lifetime ISA:

  • Cash Lifetime ISA – Cash Lifetime ISAs work in a similar way to a traditional savings account and are ideal if you want to keep your money in cash rather than invest it. Most providers pay an interest rate on Lifetime ISAs and, like a normal Cash ISA, interest is tax free.
  • Stocks and Shares Lifetime ISA – If you want to try and make a bit extra on your Lifetime ISA by investing your contributions, and you’re prepared to consider a longer time frame for your investment, you could open a Stocks and Shares Lifetime ISA. Profits will be exempt from Income Tax and Capital Gains Tax, but you’ll likely have to pay an ongoing management charge as a percentage of any profits made.

You can hold both a Cash and a Stocks and Shares Lifetime ISA, but you can’t open or pay into both in the same tax year. You can also only withdraw the government bonus on one account.

You should consider a Stocks and Shares Lifetime ISA in the same way as any other investment. 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.

4. Strict withdrawal rules mean you aren’t tempted to take any money out

As Lifetime ISAs are designed to encourage saving, they come with strict rules about withdrawals.

If you want to withdraw money from your Lifetime ISA without using it to buy a first home or before you’re aged 60, you’ll have to pay a 25% withdrawal fee on whatever you want to take out. This takes away the government bonus, plus a bit of your money too.

However, these withdrawal rules could be beneficial to you as it means you’ll be less tempted to take money out of your designated “first home” pot. This could help focus your saving even further, and even encourage you to think more about how much you can afford to put in.

5. If you’re buying as a couple, you can both benefit from the government bonus

If you’re buying as a couple, you and your partner can both have a Lifetime ISA and draw the government bonus on the same property. This effectively doubles the amount you’ll receive when you claim the bonus.

This could help you build up your savings a little faster, and also give you some extra money towards a deposit. A larger deposit typically also means lower interest and repayments, so that extra 25% bonus on your partner’s account could reduce the long-term costs of your mortgage.

Get in touch

At NM Money, we can advise you on how a Lifetime ISA could help you in buying your first home. To speak to one of our experts, request a callback or call us on 03300 583 859.

Please note:

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.