TV property expert Phil Spencer has delivered a stark warning to first-time buyers about using a Lifetime ISA to save for a property deposit, cautioning that ignorance of the rules could result in a “hefty” penalty.
In the first episode of the TV personality’s new Youtube channel, First Home Focus, in which he shares his top tips for first-time buyers, Mr Spencer said saving a big enough deposit is still the “elephant in the room” for aspiring first-time buyers.
However, he also cautioned that the Lifetime ISA (LISA) – the Government’s flagship scheme to help more people save up for their first home – might not be right for everyone because of the strict rules governing LISA accounts.
Before delving into the rules, Mr Spencer explained that a “typical” deposit can be anything from between 5% to 25% of the value of the property.
He said: “This is something you really are going to need to save for and work hard to try and gather. If you have, for example, a 5% deposit, this would leave you needing to borrow 95% of the cost. That would be known as 95% Loan to Value (LTV).
“But be aware, the higher the LTV, the more costly the mortgage will be in the long-run. In an ideal world, the greater the deposit, the more favourable the rate and more cost-effective the mortgage.”
“So how can you save for a deposit? One option is to stash your cash into a lifetime ISA.”
He noted that these are available by some banks and building societies, and whatever people save each year is topped up by the Government by 25% up to a maximum bonus of £1,000 a year.
Mr Spencer continued: “So if you save the maximum allowance, which is currently £4,000 a year; with the Government top-up, you’ll add £5,000 to the kitty every year.”
However, he warned: “You can only use the money towards buying your first home and that has to be for £450,000 or less.
“Use it for any other purpose before you’re 60 and you’ll pay a hefty 25% government withdrawal charge, so you’d actually get back less than you paid in.
“The withdrawal charge also applies to any withdrawal in the first 12 months of your lifetime ISA, even if it’s to buy your first home.”
He emphasised: “So, if you’re planning on buying within the next year then this might not be the right account for you. But otherwise, it’s really good news.”
While the accounts yield high, tax-free returns, the strict governing rules on LISAs have grown increasingly controversial.
Research by AJ Bell found first-time buyers hoping to use one to buy their first home could be squeezed out of buying a terraced house in more than 50 regions of the UK, due to the £450,000 cap.
Even a typical flat is projected to cost more than the £450,000 limit in five years in 17 regions, including many on the fringes of the capital.
AJ Bell is calling on the government to review Lifetime ISA rules and increase the purchase price limit, bringing it in line with house price growth since 2017 to support buyers onto the property ladder.
Dan Coatsworth, AJ Bell investment analyst, said: “Aspiring homeowners could be frozen out of using a Lifetime ISA unless this flaw in the system is fixed.
“While in many parts of the country a typical first home will cost far less than £450,000, large parts of London are already well over the threshold for a terraced house or a flat. Lifetime ISAs may not be designed to help people buy homes in Kensington or Fulham, but Watford and Welwyn surely shouldn’t be off limits.”
He added: “The property valuation cap hasn’t changed since the Lifetime ISA launched seven years ago, even though property prices have subsequently moved higher across parts of the UK.
“Increasing the £450,000 limit and ending the unfair exit penalty levied on top of the government bonus would ensure Lifetime ISAs help as many aspiring homeowners as possible.”
