11% of first-time buyers who bought a home with a mortgagein 2022-23 benefited from a lifetime Isa bonus from the government, according to analysis of HMRC data by investment platform, Hargreaves Lansdown.
The investment firm says the number of its customers receiving a bonus increased by 7% year-on-year in 2023, with first-time buyers getting an average of £747 towards their deposit. All in all, 56,100 people used a lifetime Isa when buying their first home in 2022-23.
Sarah Coles of Hargreaves Lansdown says: 'The proportion of first-time buyers holding a lifetime Isa has been growing every year since accounts launched in 2017.
'The number of people paying into one of our Isas and receiving bonuses has also risen each year.This means that over the coming years, we can expect lifetime Isas to be even more instrumental in getting people onto the property ladder.'
Read on to learn about how lifetime Isas could help you buy your first home, and discover the pros and cons of opening an account.
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What is a lifetime Isa?
Lifetime Isas are tax-free savings accounts that pay a bonus when you buy your first home.
When you add money to a lifetime Isa account, the government will top up your savings by 25%.
The maximum bonus you can accrue each year is £1,000. This would require £4,000 of savings.
The bonus is added to your account each month, but you can only withdraw it when buying a home or after reaching the age of 60.
As with a standard Isa, you'll be able to earn interest on your savings as you go.
Lifetime Isa: the rules you need to know
Before signing up for a lifetime Isa, you need to be aware of some important rules (and drawbacks).
First, you must be aged between 18 and 39 when you open the account.
Next, you can only use your bonus on properties priced up to £250,000, or £450,000 in London.
This will be fine for some first-time buyers but may be an issue for those who buy bigger properties or are buying in areas with higher house prices.
You'll also need to pay a penalty if you withdraw your money before the age of 60 for any reason other than buying a home.
The penalty is 25% of the amount withdrawn. This means that, all in all, you stand to lose the 25% government bonus and a further 6.25% of your savings.
- Find out more:how much deposit do I need for a mortgage?
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Criticism of lifetime Isas
Lifetime Isas have been very popular since their launch seven years ago, but critics say they have failed to move with the times.
There are two key areas of debate. Firstly, the price cap for first-time buyers has remained unchanged since 2017 despite house prices rising significantly in that time.
This means that there are now far fewer properties eligible compared to when the scheme started. Ultimately, this increases the likelihood that some people will cash out their savings rather than use them towards buying a property.
This scenario would trigger the withdrawal penalty we mentioned earlier - and the size of the penalty is another aspect of lifetime Isas that has faced criticism.
There were rumours that the government was going to scrap the withdrawal penalty for people buying a home costing more than the price caps in the recent Budget, but this didn't come to pass.
Are lifetime Isa rates attractive?
Right now, the best rates available on lifetime Isas are a little over 4%.
This means that if you're looking to buy a home in a few years, you might be able to accrue a decent amount of interest to bolster your deposit.
Higher rates of just over 5% are available on standard instant access cash isas, but crucially, these don't pay any bonus on your savings.
You can find the latest rates in our guide to the best lifetime Isas.
Are lifetime Isas a good option for first-time buyers?
If you're putting money aside specifically towards buying a home, a lifetime Isa is a good way of boosting your deposit, especially if you're going to save for a few years or more.
However, the withdrawal penalty means you should consider whether you can definitely ringfence your savings specifically for buying a property.
You might be better off putting the money elsewhere if you can't guarantee this.
If you're looking to buy soon, you might also miss out on your free cash, as you'll need to have been saving into a lifetime Isa for at least 12 months before you can claim your bonus.
- Find out more:mortgage deposit calculator
Help with buying your first home
Saving a deposit is one of the biggest barriers to buying your first home, but alongside lifetime Isas, there are some options you can look into.
- 95% mortgages:most banks offer 95% mortgages, which allow you to buy a home with a 5% deposit. One word of caution - these mortgages tend to come with higher interest rates than lower loan-to-value deals. Other options are available - we recently covered the launch of a mortgage for borrowers with deposits of £5,000.
- Guarantor mortgages: there are many ways your parents can help you buy a home - it's not all about the 'Bank of Mum and Dad'. For example, guarantor mortgages allow your parents to use their home or savings as collateral for your mortgage. Some innovative deals are available - see our guarantor mortgages guide for more information.
- Shared ownership:shared ownership allows you to buy part of a home (eg 25%) and pay rent on the rest. This is popular in expensive cities such as London, but there are drawbacks, not least the combined cost of your mortgage and the rent on the part of the property you don't own.
- First Homes:the government's First Homes scheme offers first-time buyers a discount of at least 30% of the property's market value when they buy a qualifying new-build home. 10,000 homes a year were due to be made available under the scheme, but the numbers so far have been much lower. If you're interested in buying a new-build, it's worth keeping an eye on developments in your area to see if they qualify.
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