First time buyer guide
What Is a LISA?
The government created the LISA so that first-time buyers could improve their chances of buying a property – using it as their mortgage or home deposit – as well as for those concerned with saving for their retirement.
This individual savings account (ISA) is tax-free and allows you to save up to £4,000 each tax year until you turn 50, with the government adding a monthly bonus of 25% to the amount saved. To put it simply: you can get a bulky £1,000 a year for every £4,000 saved in a tax year, for free.
Can I Open a LISA?
If you are a permanent UK resident or a Crown Servant aged between 18 and 39 you can open a LISA with any bank, building society or investment manager offering them.
How Does it Work?
You can save money into your LISA as a lump sum or by putting in money when you want. The government will add a 25% bonus monthly to your savings every year until your 50th birthday. After the age of 50, you can save it for a rainy retirement day.
If you’d like to use your LISA to buy a house, you can only do so if it’s your first-ever property and worth up to £450,000. The house must be for you to actually live in, not to rent out or use as a holiday retreat.
You can withdraw money from your LISA before you’re 60, but you’ll have to pay a 25% penalty for withdrawals not used for LISA purposes. And, no, this doesn’t leave you where you started. If you’ve saved £4,000 and you received a £1,000 bonus for it, the 25% withdrawal penalty on the resulting £5,000 would leave you with £3,750. In other words: you’d lose over 6% of your contribution. Something worth bearing in mind.
If you’re terminally ill or you die, the penalty does not apply.
Once your LISA is open, you’re free to transfer your money to another provider if their rates suit you better.
How Soon Can I Use My LISA to Buy My First Home?
In order to use your LISA for a home purchase it needs to have been open for at least a year. Also, if you’re buying a home with your partner and you both have a LISA, you could combine them to buy the house together.
Looking to buy in less than twelve months? Don’t panic! Maybe the Help to Buy ISA could be a good choice for you.
Types of LISAs
The LISA provides two savings options:
- Cash LISA: you put in cash like in a savings account and get interest on it.
- Stocks and Shares LISA: your money is invested in stocks and shares so the return you get will depend on how well they do. There is a risk attached to this type of product as you might make a loss. That’s why they are typically recommended as a long term investment (at least 5 years) to allow time to ride out any bumps in the market.
How a Help to Buy ISA Differs From a Lifetime ISA
- It takes monthly contributions only vs lump sums.
- The yearly savings are £2,400 (£3,400 in the first year) vs a LISA’s £4,000.
- The bonus payment is granted only when the house is purchased vs a monthly bonus.
- The maximum price for the house is £250,000 (£450,000 in London) vs a LISA’s £450,000 anywhere in the country.
- It can be used for buying a house when you’ve saved £1,600 (which is possible within 3 months) vs a LISA’s 12-month opening period.
- Any first-time buyer aged 16 or over can open one vs any 18 to 39 year-old UK resident in a LISA’s case.
- It can only be used for a mortgage deposit vs a LISA’s home and mortgage deposits.
- You can withdraw money if you’re not buying a home at any time (but you won’t get the bonus) vs a LISA’s having to be over 60, or not getting the bonus and paying a 25% penalty if withdrawing money earlier.
|Lifetime ISA||Help to Buy ISA|
|Lump Sums||Yes||Only an initial £1,000 allowed (plus £200 monthly contribution)|
|Yearly Saving||£4,000||£3,400 in the first year
|Bonus Payment||Yearly (interest made on bonus)||When house is purchased|
|Maximum Home Price||£450,000||£250,000
£450,000 (in London)
|Can Be Used for a Home Purchase||After 12 months of LISA being open||When you’ve saved £1,600 (possible within 3 months)|
|Who Can Open It||UK residents aged 18 to 39||First-time buyers aged 16 or over|
|Can Be Used For||Home & mortgage deposits||Just mortgage deposit|
|Withdrawing Money If Not Buying a Home||Yes, when you’re 60+ (if earlier you won’t get bonus)||Yes, at any time but you won’t get the bonus|
Which one Is Right for Me?
So, if you’re not sure whether you’ll be buying a home, are over 40, or in a hurry to purchase a house in under 3 months, a Help to Buy ISA might be just what you need.
However, if you’re definitely buying a home, are a UK resident between 18 and 39 years old, you’re not in a hurry to purchase a house in under a year and the home you’re interested in doesn’t cost more than £450,000, remember the juicier bonus that a Lifetime ISA can give.