First-time buyers missed out on £244m of free cash by not taking advantage of a savings scheme
THOUSANDS of first-time buyers missed out on millions of pounds in free cash last year by not putting their savings into a Lifetime ISA.
First-time buyers often use Lifetime ISAs or LISAS to get on the property ladder.
But a new analysis of government data by savings and investment app Moneybox shows that potentially thousands of first-time buyers could have benefited last year if they had used a LISA.
When you open a LISA, savers get a 25% bonus on top of the money paid into the account, up to £4,000 per year.
So if you save the full €4,000 in the account, the maximum bonus you can earn is €1,000 per year.
However, in 2022/2023, only 56,100 people bought their first home with a Lifetime ISA.
It means that of the 300,000 registered first-time buyers who bought a home during this period, up to 243,900 could have missed out on the government bonus offered by saving in a LISA.
According to Moneybox, this equates to a potential loss of £243,900,000 in ‘free money’ in government LISA bonuses in 2022/2023.
According to Generation Rent, saving a first home deposit now takes an average of ten years.
But for anyone saving with a LISA who can save the full £4,000 each tax year over that period, aspiring first-time buyers can save £40,000 and also get a £10,000 boost through the government bonus.
More than 18 million Britons are currently eligible to open a LISA.
Brian Byrnes, head of personal finance at Moneybox, said: “Saving the money needed for a deposit remains one of the biggest hurdles many face on the road to buying a home.
‘The LISA has been a fantastic support for savers trying to get a deposit together, and perhaps even more importantly, it has instilled healthy savings and investment habits that will stick with people throughout their lives.
“An entire generation of starters in the housing market has made their dream of home ownership come true. More than 170,000 homes have been purchased since the introduction of the product in 2017.”
However, experts including Martin Lewis have warned that many are unable to reap the benefits of these savings accounts due to the finer details.
First-time buyers using a LISA to buy a property can only buy a house costing no more than £450,000.
If savers use the money to buy a property that exceeds the plan’s £450,000 limit, they risk a 6.25% withdrawal penalty.
This means that someone who has saved £20,000 will only get £18,750 of their money back if they choose to withdraw it.
And if you want to withdraw money for any other reason, the fee is 25% of the amount withdrawn.
This is determined after your bonus has been paid out. Please note that you will only receive the bonus if you withdraw money from the account 12 months after your first payment.
Brian said: ‘Introducing a penalty-free annual emergency withdrawal allowance, so that savers are not penalized if they need their money in an emergency, could provide further reassurance to those in need.
“In addition, although the property price cap has affected less than 1% of Moneybox Lifetime ISA customers to date, if it had risen in line with house prices it would have reached £600,000.
“That is why we call for the price ceiling to be indexed in line with house price inflation.”
What is a lifetime ISA?
New buyers saving into a LISA for the first time can deposit up to £4,000 into this account each year tax-free.
The government adds a 25% bonus to your savings, up to a maximum of £1,000 per year.
For example, if you save €4,000, you will receive a bonus of €1,000.
The amount you pay is linked to your annual ISA allowance (£20,000 for 2023/24). For example, if you pay £1,000 into your LISA, you can still pay £19,000 into other ISA products.
The bonus you earn does not count towards your ISA allowance.
You can open a Lifetime ISA with any bank, building society or investment manager that offers the product.
You can only open a LISA if you are between 18 and 39 years old.
You can have multiple Lifetime ISAs, although you can only pay into one each tax year.
You can also transfer your Lifetime ISA to another provider, for example, to get a better interest rate.
If you want to use a Lifetime ISA to buy a house, there are some restrictions you should be aware of:
- Only first-time buyers can use Lifetime ISAs to buy a house, meaning you cannot own or have owned a house in Britain or anywhere else in the world.
- You need to buy a house for a maximum of € 450,000.
- You must buy a house in which you plan to live. The scheme is not intended for buying a house that you want to rent out, or a holiday home.
If you don’t use it to buy your first home, you can continue paying into a LISA until you’re 50.
You can then withdraw all or part of your LISA when you turn 60, without paying any costs.
What types of lifetime ISAs are there?
There are two different types of LISAs: a cash LISA and a stock LISA.
A cash LISA may be worthwhile if you are saving for your first home and plan to buy it within a few years.
Interest is paid out tax-free on both the amount you deposit and on top of the government bonus.
Because the account is an ISA account, the interest earned does not count towards your personal savings allowance.
A stocks and shares LISA may be more suitable if you are saving for your retirement over a longer period.
This is more complex because investment profits come in the form of dividends, capital gains and bond interest.
Here too, the interest earned does not count towards your personal savings deduction.