How a Lifetime ISA can help you to afford a mortgage deposit

With the rising costs of housing, it can sometimes be difficult to save up enough for a mortgage deposit. According to figures from the Office for National Statistics, the average UK house price is now £249,000, which means even a high loan-to-value mortgage can require a significant deposit.

If you want to boost your savings and build up your deposit as quickly as you can, read on to find out how a Lifetime ISA could help you.

A Lifetime ISA can help you save for the future in a tax-efficient way

A Lifetime ISA (LISA) is a type of Individual Savings Account designed to help people to save for the deposit on their first home. If you choose not to use it in this way, you can also use it to save for retirement.

You can open a LISA if you’re a UK resident between the ages of 18 and 39. You can make contributions to it until your 50th birthday.

Each tax year you can save up to £4,000 into a LISA and, like other ISAs, any growth on your savings is tax-free. This means that they can be an effective and tax-efficient way to save for the future.

The main benefit of a LISA is that the government will top up any of your contributions with a 25% bonus when you use it to buy a house or save for retirement. This means that if you save the full £4,000 annual allowance, you’ll benefit from a £1,000 bonus, bringing your total annual savings up to £5,000.

If you open a LISA at 18 and make the maximum contributions until you reach the age of 50, you could benefit from a maximum bonus of £33,000.

Remember not to go over the £20,000 annual ISA allowance if you have other ISAs

One important thing to bear in mind if you want to open a LISA is that you have an overall annual limit for the amount you can contribute to your ISAs. In the 2021/22 tax year, this limit is £20,000.

This means that you can split this allowance between a LISA (with its maximum annual contribution of £4,000) and other ISAs.

For example, if you’re looking to grow your wealth then you may want to consider opening a Stocks and Shares ISA, which allows you to invest your money. While this does have some risk attached, it can result in higher returns than if you saved in cash.

Since investing comes with potential risk, before you open a Stocks and Shares ISA you may benefit from seeking professional advice so you can make informed decisions.

You can withdraw from your LISA when buying your first home or funding retirement

There are two situations in which you can make withdrawals from your LISA without incurring a penalty. These are:

  • Using the money to buy your first home
  • Funding your retirement if you reach the age of 60.

While you can withdraw cash from your Lifetime ISA before the age of 60, you’ll typically have to pay a 25% penalty.

For example, if you saved £1,000 and received a government bonus of £250 on top of this, you’d have a total fund of £1,250.

If you made a withdrawal before the age of 60 for something that was not the purchase of a house, you’d have to pay a 25% penalty on the ISA’s balance of £1,250. Therefore, your total charge would be £312.50, and so you’d receive £62.50 less than the amount you invested.

Bear in mind that there are conditions when using a LISA

If you want to use a LISA to purchase a home, you need to have had it open for at least 12 months to be able to use it. This means that if you’re planning to buy your first home within the next year and haven’t already opened one, you will not be able to benefit from this scheme.

Furthermore, you’ll also need to buy a property that costs no more than £450,000 with a residential mortgage. This includes Right to Buy, shared ownership, self-build, and Help to Buy loans.

When you come to buy the property, the funds in the ISA will be paid directly to your solicitor or conveyancer.

Since this is only intended to help first-time buyers, if you’ve owned property before then you will not be eligible to use a LISA when buying another home.

If you do not use it to buy a property, you can leave the funds invested until your 60th birthday. After this, you can make tax-free withdrawals to help fund your retirement.

Get in touch

If you’re considering opening a Lifetime ISA but aren’t sure if it’s the right saving vehicle for you, we can help. Email or call us at 0207 808 4120 to find out more.


Please note: Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.