The average deposit for first time buyers in 2016 was £32,321 according to the Halifax*. A first time buyer who is able to save the maximum £4,000 each year into a LISA and receive the full Government bonus of £1,000 each year would have a £32,321 deposit in six or seven years, depending on the level of investment growth they achieve (see Table 1 below).
Someone saving half the maximum amount each year would take 10 or 13 years to reach the average deposit, depending on the return they achieve.
So, for anyone under the age of 40, the LISA is a great option for building up a deposit on a first home. However, there are three important things that first time buyers need to be aware of as they open a LISA. Tom Selby, senior analyst at AJ Bell, explains:
1. Year one – no partial withdrawals
“The first year of the LISA will be ‘all or nothing’ when it comes to withdrawals – savers will have to either leave their money invested for the entire period, or take the whole lot out, close the account and start their savings clock again.
“From April 2018 onwards partial withdrawals will be possible, although investors will have to watch out for any exit penalty they might incur.”
2. Exit penalty – the sting in the tail
“First time buyers using the LISA to purchase a property can take all the money out with no charge and no tax to pay. This also applies if they are aged over 60 or terminally ill. However, withdrawals in all other circumstances will be hit with a 25% exit penalty.
“A first time buyer paying in half the maximum amount for 13 years into a cash LISA with a 1% per annum return, would get back £26,147, just £147 more than the £26,000 they had personally contributed.” (See Table 2 below which shows what the fund value in Table 1 would reduce to if it was not used for a house purchase an incurred a 25% exit penalty).
3. Think carefully before opting out of a workplace pension
“First time buyers considering the LISA but keen not to see their monthly take home pay drop too much might be tempted to opt-out of their workplace pension. This would be a bad idea in almost all circumstances. Under auto-enrolment all employers will eventually be required by law to match your first 3% of contributions, and many will offer an even better deal than this. Giving up this free money, which is way more generous than the LISA Government bonus, could have a very negative impact on retirement savings.
“First time buyers should not view the LISA as an alternative to a pension but as an additional saving option to help them get on the housing ladder.”
Table 1 – fund value available for a deposit on a first home:
Personal contribution each year | £4,000 | £4,000 |
| £2,000 | £2,000 |
Government bonus each year | £1,000 | £1,000 |
| £500 | £500 |
Type of LISA | Equity LISA returning 5% per annum | Cash LISA returning 1% per annum |
| Equity LISA returning 5% per annum | Cash LISA returning 1% per annum |
1 year | £5,200 | £5,040 |
| £2,600 | £2,520 |
2 years | £10,710 | £10,140 |
| £5,355 | £5,070 |
3 years | £16,496 | £15,292 |
| £8,248 | £7,646 |
4 years | £22,570 | £20,495 |
| £11,285 | £10,247 |
5 years | £28,949 | £25,750 |
| £14,474 | £12,875 |
6 years | £35,646 | £31,057 |
| £17,823 | £15,529 |
7 years | £36,418 |
| £21,339 | £18,209 | |
8 years |
| £25,031 | £20,916 | ||
9 years |
| £28,908 | £23,650 | ||
10 years |
| £32,978 | £26,412 | ||
11 years |
|
| £29,201 | ||
12 years |
| £32,018 | |||
13 years |
| £34,863 |
Table 2 – investment return after paying a 25% exit penalty where applicable
Personal contribution each year | £4,000 | £4,000 |
| £2,000 | £2,000 |
Government bonus each year | £1,000 | £1,000 |
| £500 | £500 |
Type of LISA | Equity LISA returning 5% per annum | Cash LISA returning 1% per annum |
| Equity LISA returning 5% per annum | Cash LISA returning 1% per annum |
1 year | £4,200 | £4,040 |
| £2,100 | £2,020 |
2 years | £8,033 | £7,605 |
| £4,016 | £3,803 |
3 years | £12,372 | £11,469 |
| £6,186 | £5,734 |
4 years | £16,928 | £15,371 |
| £8,464 | £7,686 |
5 years | £21,712 | £19,312 |
| £10,856 | £9,656 |
6 years | £26,735 | £23,293 |
| £13,367 | £11,646 |
7 years | £27,313 |
| £16,004 | £13,657 | |
8 years |
| £18,773 | £15,687 | ||
9 years |
| £21,681 | £17,738 | ||
10 years |
| £24,734 | £19,809 | ||
11 years |
| £21,901 | |||
12 years |
| £24,013 | |||
13 years |
| £26,147 |