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Should I use a Lifetime ISA to help buy my first house?

07 February

Should I use a Lifetime ISA to help buy my first house?

Lifetime ISAs are a government-backed way to increase your savings in order to buy your first property, so the easy answer is – yes!

What is a Lifetime ISA?

A Lifetime ISA is a tax free savings account which allows you to invest up to £4,000 per year, to put towards purchasing your first home (or for your retirement, after you hit 60).

How does a Lifetime ISA help me to save more money?

For every £4 you save, the government will invest £1 – this works out as a chunky 25% bonus on your savings each year! So if you invest the maximum of £4,000 per year, you’ll get £1,000 free cash from the Government to make it up to £5,000. Plus, an ISA allows you to earn tax-free interest on what you save. You can put in the £4,000 as a lump sum, or just put in cash whenever you can.

The bonus is added to your account on a monthly basis, if you’ve contributed that month. The bonus is paid every year until you turn 50.

Am I eligible to open a Lifetime ISA?

Anyone between the ages of 18 and 39 can open a Lifetime ISA, so it’s unlikely that you have any excuse to put if off!

Can I use my Lifetime ISA savings to buy my first house?

  • The property you are purchasing has to be worth £450,000 or less.
  • You must be buying the property with a residential mortgage – not a buy to let mortgage. This is because the Lifetime ISA is supposed to assist with buying your first home – not for you to rent it out.
  • Your Lifetime ISA must have been open for 12 months before you are able to withdraw any money. So, if you’re wanting to buy the house within a year and you haven’t yet opened a Lifetime ISA, you won’t be able to use this scheme to assist you. Really, if you have even a tiny possibility of being a first time buyer at some point in the near future, you should open a Lifetime ISA with the minimum of £1, just to get the 12 month clock started. Then, you can add to this as and when!
  • You must be a first time buyer! If you’ve owned a property before, inside or outside of the UK, you can’t use a Lifetime ISA towards buying your first property. Owning a property includes owning one (or a share of one) which was inherited, even though you may not have lived there or the property might have been sold straightaway. You’re also not deemed a first time buyer if you have owned a company/had a trust that owned residential property that you are (or were) able to live in.

I’m buying my first house with someone else. Can we both use a Lifetime ISA to help with the savings?

If you are looking to buy your first house with somebody else, you can each use a Lifetime ISA to save extra money – there’s no such thing as a joint Lifetime ISA. This is a really good idea to build up a deposit even faster!

If you’re a first time buyer and the person you are purchasing with is not, you can still open one and use it towards buying a property together.

The £450,000 property value limit does not double if there are two people buying the property. Two people buying their first home can only purchase a property costing £450,000 or less.

Are there any downsides to using Lifetime ISAs to save money?

  • If you want to withdraw money from your Lifetime ISA before it has been open for 12 months, you will be charged a withdrawal charge. You should bear this in mind if you are considering buying your first property as this may restrict when you can complete the purchase of the property.
  • If you use the savings for anything other than purchasing your first home, or retirement, you will have to pay back 25% to the Government. This is equivalent to a 6.25% loss on the money you contributed, meaning you could therefore potentially end up with less than you invested, so you need to be sure that a Lifetime ISA is the right way for you to save. (You don’t have to pay this withdrawal penalty if you are terminally ill. If you pass away, the funds including interest and bonus are passed on to your beneficiaries without the 25% penalty being taken off.)

Can I use my Lifetime ISA savings for a deposit on a property?

The savings and bonus in a Lifetime ISA can be used towards a deposit on a first home worth up to £450,000. This is a great advantage over the Help to Buy ISA, where this wasn’t possible.

However, the property purchase needs to be completed within 90 days of your conveyancer receiving the funds withdrawn from the Lifetime ISA. If completion is delayed, an extension can be requested, or if the purchase is not going ahead, the funds have to be returned to the ISA.

Is a Lifetime ISA the same as a Help to Buy ISA?

No, there are several differences between the two.

As of 30th November 2019, Help to Buy ISAs can no longer be opened. These ISAs only allowed monthly payments of up to £200, and could be used towards the purchase of a first home up to the value of £250,000 (or £450,000 in London).

A Lifetime ISA can also be considered more helpful than a Help to Buy ISA as the bonus is paid monthly, rather than having to be applied for at the stage of actually purchasing a property as with the Help to Buy ISA.

How do I use the Lifetime ISA funds?

This is where we come in! When you are ready to buy your first home, you will need to provide your solicitor/conveyancer with the information necessary, and complete a declaration. We will then contact the ISA manager and provide them with the necessary information for them to release the funds. We will then receive the funds within 30 days.

The conveyancing department at Bell & Buxton are ready to assist you with purchasing your first home, whether you have a Lifetime ISA or not! Contact us today.