How the Lifetime ISA can shave years and thousands off your home deposit savings plan

Lots of wannabe first-time buyers may feel like their dreams of getting on the property ladder are slipping further away. The past couple of years have been tough for those who want to buy their first place, with house prices rising dramatically and the mortgage market being an increasingly terrifying place to be.

However, the combination of steady saving, free government money and investing can help to shave years as well as thousands of pounds off your homebuying plans. Someone with a 10-year time horizon can put away £3,000 a year to get enough for a 10% deposit on the average UK home. By using a Lifetime ISA these savings will be topped up by £750 a year from the government bonus, with investment growth of 5% a year adding another boost on top. Using a Lifetime ISA will cut two years off your deposit savings and mean you need to contribute £6,000 less than if you saved in a normal ISA. In total, in this example, over the 10 years you will save £30,000, the government will add £7,500 of free money and investment growth will add another £12,000 on top. The beauty of compounding means that not only do you get free government money but you also get investment growth on that money, and growth on that growth, supercharging your deposit savings.

One of the big issues for first-time buyers is that they often feel by the time they have saved enough money, house prices have risen again, meaning they need to save more – and so they find themselves in this endless cycle. By increasing the current average UK property price by average house price growth over the past 40 years, which is 5.5%, we can estimate what house prices would be in 10 years and target the deposit to that. The current UK average is £294,000 but this will grow to £503,000 in 10 years, based on historical growth. Clearly any drop in house prices in the short term, as has been predicted, will give a boost to first timers’ homebuying plans by lowering house prices and reducing the required deposit.

While 10 years might seem like a long time you can shave this time period down if you have more money to put away each year – if you put the maximum £4,000 into the Lifetime ISA each year, you’ll get to your target in just eight years. Or you can halve your time horizon if you buy with someone else – the beauty of the Lifetime ISA is that if you buy with another eligible first-time buyer, you can both use it and each claim up to £1,000 in free money each year from the government. If you each put away £3,000 a year you could halve your time horizon to just 5.5 years.

Conversely, £3,000 a year (or £250 a month) might seem like too much money to save – particularly in the midst of a cost-of-living crisis. You could halve this figure and instead aim for a 5% deposit on your future home. Lots of mortgage lenders will give you a 95% mortgage, you just usually pay higher interest rates on the borrowing. The deposit target is also based on the average UK property price, meaning you could hunt out a cheaper area or smaller property to reduce you target deposit. For example, if you saved £100 a month over 10 years you’d have built up a pot worth £20,000 – giving you a 5% deposit on a £400,000 home.

Source: AJ Bell

Lifetime ISA explained

A Lifetime ISA (LISA) is designed to help savers save for their first home or retirement. For every £4 you put in, the government adds £1 of free money up to a maximum contribution of £4,000 a year and government bonus of £1,000 a year. You must have had your LISA opened for at least 12 months before using it to purchase a property if you want to utilise the government bonus.

You can open a LISA between the ages of 18-39 and continue to contribute until you turn 50. You may face an early access withdrawal charge of 25% if you withdraw from your LISA prior to buying your first home or before age 60.

Important information: These articles are for information purposes only and are not a personal recommendation or advice.

How you're taxed will depend on your circumstances, and tax rules can change. ISA rules apply. A Lifetime ISA isn't for everyone. If you withdraw money before age 60, unless it's to buy your first home, you'll pay a government withdrawal charge of 20%. Please note, the withdrawal charge is changing to 25% from 6 April. And if you choose to save in a Lifetime ISA instead of enrolling in, or contributing to, your workplace pension scheme, you'll miss out on your employer’s contributions. Your current and future entitlement to means-tested benefits may also be affected. How you're taxed will depend on your circumstances, and tax rules can change. Pension rules apply.