How a Lifetime Isa can help you get up the housing ladder

‘The Lifetime Isa is a no brainer’: How savers can work their way up the housing ladder with a 25% boost – but beware the catch if you don’t buy

  • Fiona hopes to buy her first home with stocks and shares Lifetime Isa
  • You can save up to £4,000 a year and receive a 25% bonus boost

Saving for a first home is often an uphill battle. But building a down payment in a Lifetime Isa can provide aspiring homeowners with a welcome boost.

If you’re looking for a way to help a child or grandchild move up the property ladder, contributing to their Lifetime Isa can help them reach their goal months or even years sooner.

In this type of Isa you can save up to £4,000 a year and get a 25 per cent raise from the government. So every £4,000 turns into £5,000 thanks to a £1,000 increase.

Aspiration: Fiona Anderson hopes to buy her first home in Bristol with Lifetime Isa stocks and shares

Fiona Anderson hopes to buy her first house in Bristol using stocks and shares Lifetime Isa concluded five years ago with asset manager Hargreaves Lansdown. The 27-year-old insurance broker has saved £6,000 so far.

Fiona accepts that it could take another ten years – and help from a partner – to find the £40,000 she believes may be needed to get a mortgage on a £300,000 two-bedroom property.

“It’s hard to get up the real estate ladder with house prices so high, so I’m happy for any help,” she says.

“The Lifetime Isa is a no-brainer.”

About the Lifetime Isa

The Lifetime Isa is by far one of the most generous savings vehicles out there. So it’s perhaps not surprising that you have to jump through some hoops to qualify.

First, money saved in a Lifetime Isa is only accessible for use as a down payment on a first home or after you reach age 60.

Second, you can only open one if you’re between the ages of 18 and 39 – though you can still contribute and receive bonuses up to age 50.

Catches on Lifetime Isas

If you intend to use the money for a down payment on your first home, the property should cost no more than £450,000. Frustratingly, this maximum has not been increased since the introduction of the Lifelong Isa in 2017, during which house prices skyrocketed.

So if you think you might need to spend more than £450,000 by the time you plan to buy, a Lifetime Isa might not be right for you. There is no guarantee that this maximum prize limit will increase in the future.

If you withdraw your money before age 60 for any reason other than buying your first home, you will be fined 25 percent and lose the bonus.

This means that you are left with less than you put in. The penalty applies to the amount deposited plus any government bonus.

So if you paid £1,000 and received £250, the 25 per cent penalty would be £1,250 – assuming no growth. So you would only be left with £937.50 which is a loss of £62.50.

Use it or lose it: The Lifetime Isa is by far one of the most generous savings vehicles out there

Use it or lose it: The Lifetime Isa is by far one of the most generous savings vehicles out there

Are you going for cash or investing?

There are both cash and investment versions of the Lifetime Isa. As a rule of thumb, the cash option may be better if you plan to withdraw your money in the next few years, while the investment version is likely to grow your money more in the long run.

Contributions from parents or grandparents can make a huge difference. If someone deposits £2,000 a year into a Lifetime Isa and sees a five percent investment growth, it would take them more than 11 years to build up a £40,000 deposit. But if they had £4,000 to salt away every year, it would take them just over six years, according to Hargreaves Lansdown.

Cash Lifetime Isa providers include online app Moneybox, which pays 3.5 percent per year; Bath Building Society, at 3.19 per cent; Paragon Bank and Newcastle Building Society, both 2.5 percent; and Skipton Building Society, with an interest rate of 2.25 percent.

AJ Bell, Hargreaves Lansdown, Nutmeg and Moneybox are the main stock and Lifetime Isas providers. You can choose your own investments or choose one of their ready-made portfolios.