First-time buyers will be able to get a Government bonus towards a first home in time to bolster their deposit when they exchange contracts under the new Lifetime ISA (LISA) scheme, which begins next year.
The move, confirmed this afternoon, comes after criticism of the current Help to Buy (H2B) ISA scheme, which provides a similar bonus. But this bonus is only available when the property sale is completed – essentially the day the purchasers get the keys.
Yet many buyers will be asked to put down a holding deposit – often 10% of the property price – at the point they exchange contracts, which can be a few weeks earlier.
While under the H2B scheme the delay in getting your bonus shouldn't be a deal-breaker, it can lead to annoying negotiations between buyer and seller, where the buyer doesn't quite have enough without the bonus for the holding deposit requested by the seller.
Former Chancellor George Osborne announced in March's Budget that LISAs would launch in April 2017, and today some of the finer detail is being outlined. They are essentially designed as means to save for retirement or for a first home.
Savers aged under 40 will be able to convert their Help to Buy ISA into a LISA between April 2017 and April 2018 only.
The LISA will allow savers aged 18 to 39 to put away up to £4,000 each year until they're 50 and get a 25% bonus from the state on top. The bonus is paid into their LISA account initially at the end of the 2017/18 tax year, and monthly after that.
But the reason it's only really for first-time buyers and those saving for retirement is that there's a huge penalty for withdrawing cash if you're under 60, unless it's to buy your first home.
See our Lifetime ISAs guide for more info on how it works.
What are the main changes announced today?
- It's made clear that all LISA savings will be available at exchange. Initial guidance hadn't stated at what stage of the buying process the funds could be handed over to your solicitor. This update makes it clear all funds will be available at exchange of contracts.
- The bonus will be paid monthly. The initial guidance had stated the bonus would be paid at the end of each tax year. But today's update says that, apart from the first year – where the bonus is paid at the end – LISA savers will get their bonuses monthly. This is a good move, as it maximises the time the bonus is in the account earning interest or investment growth.
- The penalty for withdrawing early is (slightly) lower. Previously, the Government had said anyone withdrawing before age 60 and not buying a home with the cash would lose all their previously paid bonuses, and interest or growth on that bonus, and pay an additional 5% charge. This penalty has now been changed to a flat 25% of the amount withdrawn.
'On property purchases it's a no-brainer'
Martin Lewis, Founder and Chair of MoneySavingExpert.com, says: "While the Lifetime ISA officially has two purposes, one for first-time buyers and the other for retirement savings, it's in property purchases where it really is going to be a no-brainer.
"Building on the success of the Help to Buy ISA, it allows you to put more money in and get a bigger bonus, and you'll be able to get that money at exchange as opposed to having to wait until completion. So not only will it help with the mortgage deposit, it'll also help with the contract deposit.
"Plus, the new rules confirm you will be able to withdraw the money when you want – though you pay a penalty for doing so – it works out that, put £1,000 in, and you'd be able to take out roughly £950. So while you should only open one if you're sure you need it, if you had to withdraw, it wouldn't be catastrophic.
"However, if you are planning on buying a home before April 2018, you are better off sticking with a Help to Buy ISA, even though you can put less in it. This is because you have to hold the Lifetime ISA for a year before being able to use it to buy a home, so in this situation you wouldn't be able to use it.
"When it comes to saving for retirement, while it does look an easier option, in fact the Lifetime ISA's only competitive for the self-employed who are basic-rate taxpayers. If you're employed, the fact these days employers have to do some matching contributions in a normal pension outweighs it, and if you're a higher-rate taxpayer, pensions have extra tax gains."