Why first-time buyers should make use of their Help to Buy and Lifetime ISAs

As the deadline for opening a Help to Buy ISA drew near, aspiring homeowners rushed to open one. Yet, thousands of accounts have nothing in them, and you could be missing out on valuable government bonuses. For savers that don’t have a Help to Buy ISA, a Lifetime ISA (LISA) is still an option that could boost your deposit.

The challenge of saving a deposit: Average first-time buyer has a deposit of £58,986

Saving a deposit is one of the first challenges would-be homeowners face. As rent and property prices have increased, many young workers have found it more difficult to pull together the deposit they need to secure a mortgage.

According to Halifax, the average first-time buyer deposit has soared to £58,986 in 2021. The average amount increased by £11,677 in the space of a year. There are huge regional variances in the amount of deposit needed, but even in areas where property prices are lower, saving a deposit can be a daunting prospect.

Typically, for your mortgage application to be approved you will need a deposit of 5%­ – 10%. However, the larger your deposit the lower the interest rate you’ll be offered on your mortgage, helping you to save money.

It’s also worth noting that you’ll usually be able to borrow around 4.5x your salary. So, you may need a larger deposit to bridge the gap if you’re unlikely to be able to borrow enough to buy the property you want.

While saving thousands of pounds can be a huge task, both the Help to Buy ISA and LISA can provide a welcome boost to your savings.

Why you should make use of your Help to Buy ISA now

A Help to Buy ISA is a type of savings account designed specifically to help first-time buyers save a deposit. When you add to a Help to Buy ISA, the government will boost your savings by 25%, up to a maximum of £3,000. The offer of free money to buy a home meant aspiring homeowners rushed to open an account before they closed to new customers in 2019.

However, according to the Guardian, hundreds of thousands of these accounts are still sitting empty. The good news is that existing customers can contribute to a Help to Buy ISA until November 2029.

So, why should you start making use of your Help to Buy ISA now?

While the Help to Buy ISA is valuable, there are restrictions. One of these is that the maximum you can deposit each month is £200. To receive the maximum government boost of £3,000, you’d need to make monthly deposits of £200 over five years. Starting to save your deposit later could mean you don’t make full use of the benefits of the Help to Buy ISA or that you need to adjust your homebuying timeframe.

Adding small monthly deposits now, even if your homeownership goal is several years away, can help you stay on track.

With a Help to Buy ISA, you will receive the government bonus when you complete a property purchase. You can withdraw money from the account, without penalty, before this point if you wish to. However, you still won’t be able to deposit more than £200 per month.

Don’t have a Help to Buy ISA? You can still open a Lifetime ISA

If you missed the deadline to open a Help to Buy ISA, or want to boost your savings further, opening a Lifetime ISA (LISA) is also an option. In some ways, the LISA is even more valuable to first-time buyers but there are additional restrictions that are important to understand.

To open a LISA, you must be aged between 18 and 40, although you can make contributions until you’re 50. Each tax year you can add up to £4,000 to your LISA, which can then either be held in cash or invested. You will receive a 25% government bonus on your contributions, which will be added to your account each month. If you deposit the full £4,000 into a LISA, you’d receive a £1,000 bonus.

However, if you decide to withdraw money for a purpose other than buying your first home before you reach 60, you will lose the bonus and a portion of your own savings. As a result, you should be sure that you’re ready to buy a home and have other savings to cover emergencies.

If you already have a Help to Buy ISA, you can still open a LISA. Maximise both accounts for a year and you’d receive a government bonus of £1,600.

Preparing for the next steps

Saving a deposit is just the start of the home-buying journey. From viewing properties to successfully applying for a mortgage, there are many steps to take, which can be confusing and daunting at times. If you’re ready to start looking for your first home, please contact us. We’ll help you understand how much you can borrow, secure a mortgage, and guide you throughout the process.

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