The last couple of years has been a mixed bag for first time buyers. Although the Government launched the Help to Buy ISA on December 1st 2015 to boost buyers’ deposits, they also withdrew the Help to Buy Mortgage Guarantee which had assisted over 86,000 people in purchasing a home with a low deposit.
Now, a new product is on the horizon. Due to be launched in less than two months, the LISA could also be good news for buyers with a small savings pot.
Lifetime ISA details
Like the Help to Buy ISA, the LISA offers first time buyers a 25% bonus on their savings. There are some differences between the LISA and the Help to Buy ISA, as follows:
|Help to Buy ISA||LISA|
|Age||First time buyers aged 16+||First time buyers aged 18 – 39 when the account is opened|
|Amount you can save||Initial deposit of up to £1,000 then £2,400 a year||£4,000 a year|
|Uses||House deposit||House deposit or pension|
|Bonus||25% up to a maximum of £3,000||25% up to a maximum of £32,000|
|Investment type||Cash only||Cash and shares|
|Maximum cost of first home||£250k (or £450k in London)||£450k|
|Requirements to get the 25% bonus towards house purchase||Save £1,600+||Once the LISA has been open for 12 months|
|When is the 25% bonus paid?||On exchange of contracts||After 12 months of opening the account, and then monthly. This allows you to earn interest on the bonus in addition to your contributions.|
|Early withdrawal?||No penalty (but you won’t get the bonus)||No penalty in the first year. After this, a penalty of 25% has been discussed for early withdrawal (i.e. withdrawing money for a purpose other than buying a first home or your pension at 60+).|
|Minimum savings||£1,600+ (you can withdraw at any time but you won’t get the bonus towards your house purchase)||Once the LISA has been open for 12 months|
The above is based on current information that is available, which may change before the LISA is launched.
The Telegraph has created a handy calculator which helps you predict how much you could make using a LISA – and also the devastating effect of withdrawing your money for some other purpose than buying your first home or your pension.
How could the LISA help?
One of the biggest struggles that first time buyers face is obtaining a mortgage if they only have a 5% deposit. Plenty of these mortgages do exist but the rates tend to be less favourable and lending criteria is likely to be applied strictly. Experts such as Martin Lewis say that boosting your deposit to the 10% band often unlocks better rates and gives you a better chance of being accepted for a mortgage.
What other help is available?
First time buyers struggling to get a foot on the property ladder could also look at:
- Shared ownership: This allows you to buy a smaller share of the property – from 25% up to 75% – and rent the remaining part from the owner. When you are ready, you can buy additional shares. Contact your local Help to Buy agent to find out more.
- Springboard Mortgage: Offered by Barclays, this allows you to purchase a home of up to £500k without a deposit. A family member must deposit 10% of the value of the home into a special savings account for 3 years minimum. They’ll earn interest and their money will be returned if you don’t default on the mortgage payments.
- Other Family Mortgages: An increasing number of lenders are offering family mortgage products. The Family Building Society has three types of account which each allow a relative to deposit their savings to provide security.
- Joint mortgage single owner: These mortgages allow a family member – a parent or guardian for example – to join in on the mortgage application. Their income will be used together with the buyers’ income when conducting the affordability tests. Their name does not go on the title so there’s no extra ‘second home’ stamp duty to pay – however, they will be jointly liable for the mortgage payments.
The above is an outline of the financial products available to help first time buyers – it is not intended to be financial advice. Please speak to an independent financial adviser to satisfy yourself of the suitability of a particular product for your circumstances.
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