How a Lifetime ISA can save years and thousands off your deposit saving

Getting on the housing ladder is the top priority for many young people, but with both house prices and mortgage rates rising it can be an increasingly hard-to-reach goal. However, using a Lifetime ISA can supercharge your savings and get you closer to your house-buying dream.

The average house price in the UK is £285,000* today, but if someone is saving for a home in the future they need to factor in rising house prices in the intervening period. While there are expectations of house prices stalling in the short term, they are still expected to rise over the long term. If they continue growing at the same pace as they have over the past 40 years** the average house price would hit £539,000 in 10 years. That means someone wanting a 10% deposit for their first home needs to have amassed £54,000 by that point.

While this is a huge sum, using a Lifetime ISA can shave years off your deposit saving and add thousands to your pot. Using a Lifetime ISA someone would need to invest £3,250 a year for 10 years to get to £54,000 in 10 years’ time, assuming investment growth of 5% a year. The government bonus would add £8,125 to that pot over the 10 years, plus you’d benefit from investment returns on that money. However, if you used a standard ISA you’d need to save the same £3,250 a year for an extra two years to get to the same deposit amount.

If someone could pay in the full £4,000 Lifetime ISA limit each year they’d generate a pot worth £66,000 after 10 years, having benefitted from £10,000 of free money from the government plus investment growth at 5% a year. That same amount saved in a standard ISA would generate a pot worth just under £53,000 after 10 years – more than £13,000 less.

The beauty of the Lifetime ISA is that you can double up on contributions and government bonus if you’re buying with another first-time buyer who is eligible for the Lifetime ISA. This means your deposit saving will take half the time or you can double the amount you contribute. For example, a couple each saving £3,250 a year would reach £54,000 of savings after just five-and-a-half years, having benefitted from almost £9,000 in free government bonus money between them.

Amid rising prices and rent costs soaring, many people won’t have the ability to save £3,250 a year. However, there is still a healthy market for 95% mortgages, meaning people could save enough for a 5% deposit and still get on the housing ladder. This means they need to target £27,000 of deposit savings over 10 years. If they invested in a Lifetime ISA they could put away £135 a month and reach that goal – they’d benefit from just over £4,000 of government bonus during that period and almost £6,500 of investment growth.

Source: AJ Bell

*Based on the Land Registry’s UK house price index: https://landregistry.data.gov.uk/app/ukhpi/
**Average house prices have risen by an average of 6.6% a year.

All figures assume 5% return a year on investment, after charges.

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.