First-time buyers could be missing out on £32,000 free cash bonus from the government
FIRST-TIME buyers could be missing out £32,000 free cash bonus from the government.
The Lifetime ISA (LISA) was launched in April 2017 and is a savings product which is designed to help people save for either a first home or retirement.
The account is tax-free and anyone aged between 18-39 can open one.
You can save up to £4,000 a year and the government will then add a 25% bonus on top.
If you save the maximum amount between the ages of 18 and 50 you could get as much as £32,000 for free.
You’ll also earn tax-free interest on your savings pot, including the added extra from the government.
If you choose to buy a property it must cost less than £450,000 and you must buy it at least 12 months after you make your first payment into the Lifetime Isa.
Myron Jobson, senior personal finance analyst, interactive investor, told The Sun that the LISA can be a useful, tax-efficient savings vehicle to help “prospective buyers achieve their dream of homeownership”.
He said: “The LISA bonus also benefits from any interest or capital growth because it is treated as part of your account once added.”
“For example, if you contribute £4,000 in a year and receive a £1,000 bonus, the entire £5,000 benefits from potential interest or investment returns.”
He added: “Over time, this compounding effect can significantly boost your overall savings.”
But there are strict withdrawal rules surrounding a LISA that prospective users should be aware of.
For example, the only way you can make an authorised withdrawal from your LISA is if you are buying a house or you are terminally ill.
If you withdraw for any other reason you are slapped with a 25% fine, which is known as an “unauthorised withdrawal” penalty.
This does not mean you just pay the 25% government bonus back, but you also get a chunk of your own cash taken away as well.
For example, if you start with £800 in your LISA and earn a £200 bonus, you’ll have £1,000 in your account.
But if you then withdraw the entire amount, you’ll have to pay a 25% charge of £250, leaving you with £750.
Myron added that while the bonus accelerates your property savings, the withdrawal penalty for non-qualifying uses can be “punitive, effectively clawing back your bonus and more”.
“Savers must also navigate limits on property price (£450,000) and timing, which could be restrictive in certain housing markets,” he added.
“It’s a useful tool, but only if its conditions align closely with your home-buying goals.”
You can also only use a LISA for a property if you have never owned one.
This includes a share of inherited property or a home overseas.
It is also worth noting that if you reached the age of 40 on or before April 6, 2018, you won’t be eligible for a LISA
HOW TO OPEN A LIFETIME ISA
If you are keen to open a Lifetime ISA you will need to choose a provider.
Before you sign up you should check the terms and conditions such as minimum deposits and how much monthly interest you should pay.
Prospective savers should also note that there are two types of LISA: cash LISA and stocks and Shares LISA.
The main difference between a cash LISA and a stocks and shares LISA is how your money is handled.
A cash LISA is similar to a cash savings account in that your money earns interest over time.
Meanwhile, if you go for the stocks and shares LISA your money will be invested in the stock market on your behalf
The first option will provide reliability but potentially lower returns.
Meanwhile the latter could help you boost your savings but comes with a risk as your savings will fluctuate depending on the stability in the market.
It is always worth using a comparison website to make sure you are getting the best LISA for your needs.
Money.co.uk has a comparison tool, or you could use sites including Compare The Market and Moneysupermarket.
Once you’ve chosen, most providers will allow you to open an account online, but you may have to go into a branch in some cases.
GETTING ON THE PROPERTY LADDER
A LISA is just one way to help first-time buyers save for their first home.
The First Homes scheme is eligible for first-time buyers across England who meet certain criteria.
In order to qualify, a buyer must be able to get a mortgage for at least half the price of the home.
The new home also needs to cost less than £250,000 after the discount has been applied, or £420,000 in London.
And the collective household income of the buyer, or buyers, purchasing the home must not exceed £80,000 a year before tax, or £90,000 if they are buying in London.
You can read more about that scheme here.
Elsewhere a number of lenders have launched mortgages which help wanna-be buyers who are struggling to get a deposit.
For example, TSB launched a new “5&5” concessionary mortgage option for its customers.
Under the lender’s new scheme, landlords would offer their tenants a 5% discount on the property’s market value in exchange for putting down a minimum of a 5% deposit.
Concessionary mortgages allow wannabe homeowners to bag a property for less than the market value.
They are usually used by landlords selling a house to their tenants, or someone selling a property to a relative.
A number of lenders offer some variation of this mortgage type including Barclays and Natwest.
What help is out there for first-time buyers?
GETTING on the property ladder can feel like a daunting task but there are schemes out there to help first-time buyers have their own home.
Help to Buy Isa – It’s a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there’s a maximum limit of £3,000 which is paid to your solicitor when you move. These accounts have now closed to new applicants but those who already hold one have until November 2029 to use it.
Help to Buy equity loan – The Government will lend you up to 20% of the home’s value – or 40% in London – after you’ve put down a 5% deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property.
Lifetime Isa – This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25% on top.
Shared ownership – Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25% to 75% of the property but you’re restricted to specific ones.
Mortgage guarantee scheme – The scheme opens to new 95% mortgages from April 19 2021. Applicants can buy their first home with a 5% deposit, it’s eligible for homes up to £600,000.