How to use a Lifetime ISA when buying a house

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Are you considering buying a house? Are you starting to save but not sure where to start? If you’ve answered yes to either of those questions, this may be for you.

What is a lifetime ISA?

A lifetime ISA is a government-backed savings scheme that could help you achieve your goal of buying your first home, but what is it and how could it help you?

How does it work?

A lifetime ISA or LISA is a tax-free savings account designed to help you with your first home purchase, retirement, or a mix of the two. You can put up to £4,000 each tax year into your LISA and the government will give you a 25% bonus on your savings contribution. There is no minimum amount you need to save to get a bonus.

If you contribute the maximum amount of £4,000 in a LISA in any tax year, the government will add another £1,000 (25% of £4,000). You can do this each year until you turn 50. So, if you open your Lifetime ISA when you turn 18 and contribute £4,000 each tax year, until you’re 50, you could earn up to £32,000 in government bonuses.

If you have another type of ISA, the Lifetime ISA limit of £4,000 counts towards your annual overall ISA limit. The annual overall ISA limit is the maximum total amount you can save into all your ISAs each tax year, which is £20,000 for the 2020-2021 tax year.

Can anyone open a LISA?

To open a LISA, you must be:

  • between the ages of 18 and 40
  • A UK resident, or a member of the armed forces serving overseas, or the spouse/civil partner of a member of the armed forces

When can I get the money?

You can withdraw money from your LISA without any penalty charge if you’re:

  • buying your first home
  • aged 60 or over

Should you find yourself terminally ill, you’d also be able to access your LISA money penalty-free.

To put the money from your Lifetime ISA towards your home purchase, you must make sure:

  • your LISA has been opened for at least 12 months
  • you don’t withdraw the cash - as you will be charged a penalty if you do so (although this has been reduced by 20% until 5th April 2021).
  • you apply to the LISA provider for the money to be sent to your solicitor or conveyancer

If you decide to purchase a home with this account, you have the option of keeping the account so you can continue to save for retirement.

Can I use it to buy any property?

To use your LISA savings towards a home purchase, the property you are buying must:

  • be in the UK
  • the first home you’ve ever owned
  • be the only home you own
  • be purchased with a mortgage
  • cost £450,000 or less
  • be where you intend to live, i.e. not a property you plan to rent out

Investing the money

The government bonus will be added to your LISA account every month and you can choose to invest it just like your other savings and be able to earn interest or invest in stocks and shares.

If you choose to keep your LISA money as cash in a savings account and earn interest in savings, the return is likely to be quite low - however, it is a good option if you expect to use the money to buy a house within the next 5 years or so.

If you invest your LISA money in stocks and shares, you could potentially earn a higher return over the long-term (at least 10 years). However, this comes with the risk that the value of your account could go up or down depending on how the stocks perform. Stock and shares are usually a good choice if you expect to use the money to fund your retirement in 20 years or more.

What if I change my mind?

You can close your LISA within the first 30 days and you will not incur any penalty nor will you receive any government bonus. If you pass the initial 30 days and you no longer want to use the money from your LISA to purchase your first home, you have two options:

Take out the money you’ve saved, however, you will face a 25% charge, meaning the government takes back the money that you’ve earned in bonuses, but the rest of your savings won’t be affected. (Please note that the charge has been reduced temporarily to 20% until 5 April 2021, as part of the government’s coronavirus measures) Leave the money in your LISA until you reach 60 years old and access it then without any charge

We hope this overview of how a Lifetime ISA works has been helpful. If you still have some questions, check out this dedicated FAQ from The Money Advice Service or this government page.

Important: This is an option, not a recommendation. Your employer does not benefit from offering this service and all your communications will be with Salary Finance Limited Trading as Neyber. This content is for guidance and educational purposes only and is generic in nature. Salary Finance Limited Trading as Neyber does not offer regulated financial advice. Please seek independent financial advice.