Is the LISA a good deal for London homebuyers?

The Lifetime ISA (also known as a LISA) was announced by the government last year as a new, flexible way for people to save money – and be rewarded for doing so. The LISA will be available from 6th April for people aged 18-39 and offers a lucrative bonus.

However, the limitations on how and when you can access the money are strict, meaning it may not be the best option for everyone.

What does the Lifetime ISA offer?

The LISA allows you to save up to £4,000 per year tax-free, and benefit from an annual government bonus of 25% on your savings contribution until you’re 50. That means you can save a maximum of £5,000 per year towards your first house or your pension, and be paid tax-free interest on everything.

You can withdraw the money when you are aged 60 or over, or to buy your first home. However, if you plan to use the money to buy a house the value of the property can’t exceed £450,000. This applies regardless of where it is in the country, including London. If you decide to take the money out of your LISA without adhering to these restrictions there’s a hefty price to pay. You’ll have to pay a 25% government withdrawal charge (the withdrawal penalty will be temporarily reduced from 25% to 20% from 6 March 2020 till 5 April 2021 due to coronavirus) meaning you’ll get back less than you’ve put in.

Lifetime ISA house price limit – is this feasible for Londoners?

If you live in London or have set your sights on buying your first house in the capital, the Lifetime ISA limit is £450,000, which might restrict the size of house you’re able to choose: in May 2022 the average London house price was £526,183, with the average terraced house in the capital priced £553,035 (up +3.8%) and the average price of a London semi-detached house of £661,506 (+6.88%).

Source: https://www.gov.uk/government/news/uk-house-price-index-for-may-2022 

London flats and maisonettes would just make the cut, at an average 2022 price of £474,802.

Other areas of the UK are substantially cheaper: the average house price in the South East was £388,531 in July 2016 and just £153,592 in the North East. However, you can’t use the LISA to purchase buy-to-let properties – so if you choose to use it to buy ‘out of town’, you’ll need to live there too.

The Lifetime ISA allowance applies per person, so things do become significantly easier if you’re choosing to buy a property with a partner or friend as this means you’ll be able to save for your deposit faster. Also, the money from your LISA can be used to purchase property under a shared ownership scheme, provided the full value of the property falls within the £450,000 limit.

The Lifetime ISA property limit verdict (and other ways to use it)

The £450,000 house value limit means that if you’re likely to want to buy your first home in London or other expensive pockets of the UK, you may find the Lifetime ISA a bit restrictive, particularly if you’d like to buy something larger than a flat or maisonette.

Although you can use your savings to buy a property worth more than £450,000 you’ll lose the government bonus, all interest earned on the extra money, and pay a penalty. However, for savers in other parts of the country where there is a wide range of houses that are likely to stay under the £450,000 capping the Lifetime ISA is a very good option.

But that doesn’t mean a LISA isn’t a good deal for Londoners. Remember, you can use it to buy your first home – or as another way to save for retirement. So it might still be right for you.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.

A stocks and shares Lifetime ISA may not be right for everyone. You must be 18–39 years old to open one. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. So, you may get back less than you put in.

Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension.

If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions.

If you are unsure if a Lifetime ISA is the right choice for you, please seek financial advice.

A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.