Lifetime ISA – Great News for First-time Buyers

It was announced in the Budget on 16^th March that a new Lifetime ISA (LISA) is being introduced from April 2017 for people aged 18-40.

It will allow people to save up to £4,000 a year and get a 25% top up (up to £1,000 a year) from the government on savings made before their 50^th birthday.

In theory, if you open a Lifetime ISA on your 18^th birthday and save until you’re 50, you’ll have £128,000 tucked away for retirement + a £32,000 government bonus + interest on both – all tax-free!

LISAs can either be used to buy a first home or can be withdrawn from age 60 as a tax-free pension supplement. Be warned, you can take the money out early, but you’ll lose the 25% bonus + any interest, and you’ll be hit with a 5% charge.

Complete Flexibility for Savers

You can put away as much or as little as you want each month, just no more than £4,000 each year, and you can choose to use some of it to buy a new home and keep the rest in a pension pot.

It’s designed to allow flexibility, freedom and choice for those wishing to save for retirement, but it’s also a great incentive for people saving for their first home. It can be put towards a deposit on a house nationwide, but it can’t be used for a home worth more than £450,000, which probably rules out most of London.

The Lifetime ISA is available to any individual aged 18–40, so two first-time buyers can open separate accounts and receive double the bonus when buying together.

Lifetime ISA vs. Help-to-Buy ISA

The recently introduced Help-to-Buy ISA can be transferred into the LISA when it launches, which would make sense with the higher annual savings limit. You can only put £200 a month into a Help-to-Buy ISA (after opening it with £1,200) and the bonus limit is £3,000.

You can continue saving into both should you wish, but only the bonus from one can be used for a deposit on a house.

Coinciding with the launch of the Lifetime ISA, the total amount you can put into all ISAs will increase from £15,240 to £20,000 a year from April 2017.

Saving for a Mortgage

To some, the £4,000 annual investment limit might seem a little restrictive, but the additional 25% from the government makes it very worthwhile. You’re unlikely to find a better return anywhere else!

The Bank of England recently decided to keep interest rates at the “rock bottom level” of 0.5% – for the seventh year running. Traditionally, borrowers gain an advantage when interest rates are low and savers are punished, so it’s great to see the Treasury taking measures to restore a fair balance.

If you’d like more information about the Lifetime ISA and how it can help you plan for your first home, please get in touch with our expert mortgage advisers today!