Just in case I haven’t bleated on about it enough, I bought a house last year (at age 26). Most of the £30k deposit I contributed to me and my boyfriend’s mortgage I saved the boring, old fashioned way (like never going on holiday or upgrading my phone) – but we got a £6k windfall by using a particular type of bank account: the Lifetime ISA.
Now, as I preface all of my posts about regulated topics, I am not a financial advisor. I have good intentions, but there’s always a chance something I recommend won’t be the best thing you could do. If in doubt, seek advice.
I don’t think any of the links in here today are affiliate. However, my plugin may turn some of them into affiliate links, so sorry about that!
- 1 What is it?
- 2 Who should get one?
- 3 Who shouldn’t get one?
- 4 My top tips for getting a Lifetime ISA
- 5 Is it actually worth getting a Lifetime ISA?
ANYWAY. Let’s talk about the Lifetime ISA.
What is it?
No, it has nothing to do with the saxophone playing character from The Simpsons. It’s a savings account where you’re allowed to pay in a max of £4,000 per tax year, and get a 25% bonus for doing so. BUT you must use it towards either the purchase of your first home, or save it for retirement.
Who should get one?
If you’re planning on buying your first home, ever, and it’s likely to cost less than £450k, you should get a LISA.
Who shouldn’t get one?
- You actually can’t open one if you’re over 40. Sorry!
- If you’re going to complete your house purchase less than 365 days from when you open your LISA.
- Ever owned a home? You can’t use your LISA bonus towards a house deposit. You can use your LISA for your pension, but the tax relief isn’t any better than what you’d get with a personal pension, and you’ll get more benefit from an employer matched scheme.
- If the first property you buy is going to be more than £450,000, you can’t use your bonus towards the deposit.
- If you need your savings for an emergency. Unfortunately, this is the major catch with a Lifetime ISA. If you withdraw money from it and it isn’t for your house deposit or pension, there’s a 6% penalty for taking your money out. It isn’t ideal, which is why you should also have money in an easy access account in case something bad happens.
My top tips for getting a Lifetime ISA
There are two types of LISA
Choose wisely between a cash LISA and a stocks & shares LISA. If you’re planning on buying a house in the next 5 years, cash is king. If you’re playing the long game then it could be a lot more lucrative to opt for a stocks & shares LISA. You could also lose money doing this, so be warned!
Double your money
Buying your first property with someone? If they’ve never owned a home before and are under 40, they can also open a Lifetime ISA to use on the same property. My boyfriend took some convincing before he got one, but it worked out in the end.
Get the juiciest interest rates
Unfortunately, there isn’t a massive amount of choice when it comes to cash LISAs. There are literally four providers, with interest ranging from 1% to 1.4%. I used Skipton Building Society for my LISA – it was the only cash LISA available at the time! I thought their customer service was fantastic, regardless.
At the moment (July 2019), the top pick for cash LISAs is Moneybox, giving you 1.4% interest. Although Moneybox is known as an investment app, this is a CASH LISA and there are no fees.
Get the timing right
IMPORTANT: you can only cash out the 25% bonus from your Lifetime ISA if it’s been open for a whole year. If you’re reading this and you’ve had an offer accepted on a house, keep scrolling hun. Not at that stage yet? Open a LISA and shove a pound in it. It’s good to start the clock ticking, just in case that perfect place comes along, a miracle happens and it only takes you a month to complete.
Ignore the low interest rates
If you’re thinking “1%? I get more than that in my current account!” Then good, I’m glad you’re getting a sweet deal, BUT it doesn’t matter. What’s important is that 25% government bonus. Me and my boyfriend got £3,000 each!
If you want to max out your interest, keep your money in a different account until March, then swap it into your LISA before the end of the tax year. You’re allowed to add £4k per tax year, it doesn’t matter when it’s added. If you can max it out, then do so, you’re not going to get 25% returns on anything else.
Close your LISA in time
I didn’t know this when we bought our house, but it can take up to 30 days to cash out a LISA. When we used ours, Lifetime ISAs were still very new, so our conveyancer had never gone through the process of closing one. It held completion up for a week for us, but Skipton were helpful and it didn’t take a month.
When you tell your LISA provider you’d like to close it to use your money towards a deposit, you have 90 days to complete the house purchase. If it takes longer, your solicitor can ask for an extension. Closing it too early is better than too late.
Is it actually worth getting a Lifetime ISA?
I recently saw an influencer who bought a flat around the same time as me answer a question about where she saved her deposit into. She just said a normal savings account…
Big mistake, HUGE.
My Lifetime ISA bonus was the largest chunk of how I added £10k to my deposit for free. I’m going to try and work out exactly what she lost out on by not knowing (or maybe not caring) how to use a LISA.
My Lifetime ISA stats
My half of our deposit = £30,000
Minus £1,508.25 interest = £28,491.74
Minus £3,123.09 LISA bonus: £25,368.65
Basically, I’ve worked out how much actual cash money I took out of my paycheque and put into savings. It also shows I managed to achieve an average interest rate of 5.9%, craaazy! I’m going to use these numbers to see just how much better off I was using a Lifetime ISA than relying on single digit interest from normal accounts.
I don’t know how big of a deposit she had, or how much her flat was but I’ll pretend she is exactly the same as me.
Now, from what I can tell, the best rate you can get on a single savings account (that allows you to put house deposit amounts of money in it), is 1.5%. You only get this rate for a year, too, but for argument’s sake, I’m going to pretend you can get this 1.5% in perpetuity.
People don’t start off with their entire deposit in a savings account, so I’m going to guess she saved up over four years like me, at a rate of £6,342.16 a year. I’m being incredibly generous with this assumption because I think in 2014 I might have saved about £500, so she’s getting the benefits of compound interest I never had.
What if you didn’t open a LISA?
Year 1: £6,342.16 + 1.5% = £6,437.29
Year 2: £6,342.16 + £6,437.29 + 1.5% = £12,971.14
Year 3: £6,342.16 + £12,971.14 + 1.5% = £19,507.86
Year 4: £6,342.16 + £19,507.86 + 1.5% = £26,142.63
Interest earned: £773.98
We both have boyfriends, so let’s double that to £52,285.26 of total savings, with £1,547.96 of that from interest.
How big of a deposit do you need?
According to TotallyMoney, a 25% deposit is where mortgage rates tend to get lower. Having 20% is definitely better than saving 5% or 10%, it may seem tiny but even a .5% rise in your interest rate can result in paying thousands more over the course of your mortgage.
Now, are they going to hit the magic number of a 25% deposit? My house was £228,000…
52,285.26/228,000 is: 22.9% 🙁 so no, they’ve missed out. They’re about £4,700 off target.
Together, my boyfriend and I banked £6,023.09 in Lifetime ISA bonuses, and that’s without interest… See what I mean?
Thinking of buying a house? These other posts might be a good place to start: