How Can the Lifetime ISA Help You Buy a Home?

How Can the Lifetime ISA Help You Buy a Home?

February 13, 2017

How Can the Lifetime ISA Help You Buy a Home?

The UK’s property market has long been held as an example of highly competitive sector, where buyers and sellers are constantly seeing house values increase from year to year. Some recent studies have shown that prices have risen by as much as 10% per month, and although there are signs that competition is decreasing there are still many buyers who struggle to come up with the money for a deposit.

To help first-time buyers get their feet on the property ladder, the UK Government introduced a whole suite of Help to Buy programs which aimed to make it easier for buyers to purchase property with smaller deposits. These schemes were widely taken up, and helped thousands of renters become buyers in the years they were active, but as of 2017 the Help to Buy schemes will cease accepting new applicants. Although the Chancellor of the Exchequer has implied that the Government intends to renew or replace these schemes, as of yet there are no concrete plans in place to help first time buyers get on the property ladder.

What is the Lifetime ISA?

The Lifetime ISA is the present Government’s alternative to the Help to Buy ISA. The two schemes are similar in that they boost a saver’s spending power by allowing them to receive a bonus payment from the Government when they buy a house. However, the details of the two accounts are distinctly different, and operate in different ways.

Help to Buy (H2B) ISA vs. Lifetime ISA

The H2B ISA provides a 25% bonus payment to the account holder when they purchase a qualifying property. There are restrictions on how much can be paid into the ISA, but it can be opened with a balance of £1,000 and added to at a rate of £200 per month. The maximum bonus you can receive is £3,000, so balances of over £12,000 won’t receive any further benefit, but the ISA will always receive 4% interest annually. Because of this limit, and the maximum deposits that can be made, the ISA can be fully funded in under five years – a £1,000 initial deposit plus 55 payments of £200 will bring it up to the maximum of £12,000.

A Lifetime ISA, on the other hand, can potentially become a life-long account. The idea is to provide a savings option to help people save for their first home, or to buy their first house. Like with a H2B ISA, the Lifetime ISA “caps” your deposits, but at the higher rate of £4,000 per year, allowing savers to invest more in their future.

A subtle but key difference in how these two savings options operate is in how they pay out the 25% bonus they offer. With a H2B ISA, the bonus is paid to you once you’ve bought a qualifying home, which means it can’t be used to contribute to your deposit; you’ll already have paid your deposit by this point. The Lifetime ISA, on the other hand, pays a 25% bonus every year on the balance of the account; if you have £4,000 at the end of the year, you’ll receive £1,000 extra in your account. This money can then be used to pay for a qualifying home, and since it’s already “your money”, it can contribute to your deposit.

However, a Lifetime ISA is designed to incentivise savers to invest in either their retirement or a home. The 25% bonus is not provided if the ISA is not used for either of these purposes (though there are exceptions for life-changing circumstances). If the ISA is used to pay for something other than a qualifying home, or if the holder is under the age of 50, the 25% bonus will be withdrawn in addition to a penalty fee and any interest accrued. This means that the Lifetime ISA can be punishing if it’s withdrawn from early, unlike the H2B ISA which carries no such penalties.

Is the Lifetime ISA Worth it?

If you’re planning to buy a home, or saving for retirement, the Lifetime ISA carries some substantial bonuses over other savings options. However, it’s not without its limitations, and though it can be very rewarding it may not suit everyone – you should consider carefully whether you’re ever likely to need access to the cash in your Lifetime ISA, because if so you may find yourself set back by punitive charges.