I’m a first-time buyer. Should I open a cash Lifetime ISA?
Skipton Building Society will become the first lender to offer a cash Lifetime ISA (LISA) from Thursday. Savers will be able to open the account from 9am, with a minimum deposit of £1 and the tax-free savings account will pay 0.5% interest. (See YourMoney.com’s Skipton to launch first cash LISA on Thursday for more information).
Since the launch of the LISA scheme in April, only three providers – Hargreaves Lansdown, Nutmeg and The Share Centre – have offered a LISA, but these require investing in the stock market.
While the investment firms say interest and take-up of the LISA has been positive, the launch of a cash version of the product could draw more attention from first-time buyers who don’t want to take risk with their money.
But is a cash LISA really the best option for wannabe homeowners or are there better alternatives?
The Lifetime ISA: key facts
Anyone aged 18 to 39 can open a LISA and put in up to £4,000 a year until the age of 50. The money must be used for a first home and/or for retirement. The government will add a 25% bonus, up to a maximum of £1,000 per year. This means savers can put away a total of £128,000 which is matched by a maximum government bonus of £32,000.
As with all ISAs, you won’t pay tax on any interest, income or capital gains from cash or investments held within a LISA. LISAs can be held in cash, stocks and shares investments, or a combination of both.
Your savings and bonus can be used to buy your first home, which must be located in the UK and cost no more than £450,000. The money can be used at any time from 12 months after opening a LISA account. Accounts are limited to one per person so if you’re buying with someone else who is also a first-time buyer, you can each receive the bonus.
Apart from in the first year, the government will charge an exit penalty of 25% on the entire amount including investment growth if the money is withdrawn and not used for a first home before the age of 60. For more information, see YourMoney.com’s Lifetime ISA guide.
Cash vs stocks and share Lifetime ISA
Now that Skipton has revealed its 0.5% interest offering, it gives us a greater understanding of the potential returns available on the cash LISA.
Charlotte Nelson, finance expert at data site, Moneyfacts, says the Skipton offering “doesn’t live up to expectation” and while savers would like to see more competition in this space, they shouldn’t get their hopes up.
She says: “While it’s great news we are finally seeing the launch of a cash LISA, the rate of the Skipton Building Society deal unfortunately does not live up to expectation.
“With inflation eroding savings and better rates being found elsewhere, savers who are potential first-time buyers will have to weigh up whether this is the right option for them.
“It is likely the cash LISA will be popular for those saving for a deposit. The higher returns of a stocks and shares ISA do come at a risk and it is this that will deter house savers.
“The dual use of the LISA seems to have put off many cash ISA providers and while savers would like to see more competition in the market, it is unlikely we see a sudden rush.”
Anna Bowes, director of Savings Champion, says: “You have to congratulate Skipton on the one hand for offering a cash version of the LISA at all, but the interest rate of 0.5% is incredibly disappointing. But this is what happens when there is no competition in the market.
“The reality is with this product, that the bonus paid by the government is much more valuable than any interest you are likely to receive from a provider, but the interest is still the cherry on the top. It is just a shame that the cherry being offered by Skipton is so puny.”
Skipton’s own calculations suggest that a 25-year-old maximising the product’s £4,000 annual allowance for eight years will have an estimated pot of £40,776.53 by the age of 33, which is thought to be an amount higher than the average first-time buyer deposit.
However, investment firm Hargreaves Lansdown says 5% return per year is a good estimate of a long-term investment return for its LISA after all charges.
The graph below, from Hargreaves, shows the stock market return compared to the average cash ISA returns since April 2012:
As can be seen, a cash ISA would have delivered modest returns while £4,000 in the stock market would be worth nearer £6,000 now.
Danny Cox, chartered financial planner at Hargreaves Lansdown, adds: “Those looking to buy their first home within the next five years should stick with a cash option in LISA, as this is not long enough to invest in the stock market and have a decent prospect of positive return.
“However, the average age of a first-time buyer is typically 30 (32 in London) so in many cases it will take much longer than five years to get onto the property ladder and once you are looking past that point, investors are likely to do much better than savers.”
Cash Lifetime ISA vs Help to Buy ISA
The Help to Buy ISA (H2B ISA) is another government initiative to help people onto the housing ladder. It was launched in December 2015 and is available for first-time buyers aged 16 or over, so older borrowers, i.e. those aged 40+ who may have just missed out on the LISA, qualify too.
However, the savings amounts and the government bonus are much less generous. You can save up to £200 per month (apart from in the first month when you can deposit £1,200) and for every £200 saved, the government will top it up with a 25% bonus, capped at £3,000. As such, those who need to secure more financial help to buy a property may find the LISA is more suitable.
Another big distinction between the two first-time buyer schemes is that the H2B ISA bonus contributes to your overall mortgage deposit, increasing the size of your savings for a first home. With the LISA, the funds, including the bonus can be put towards an exchange deposit, provided the property purchase is completed within 90 days of your conveyancer receiving the withdrawn funds from your LISA manager.
With the H2B ISA scheme, the money can be used against the cost of buying a house worth up to £450,000 in London or up to £250,000 elsewhere. As such, if the property you are purchasing is outside London and has an asking price of between £250,001 and £450,000, the LISA could be more appropriate. See YourMoney.com’s Help to Buy ISA: the facts for more information.
However, there are more than 30 banks and building societies offering a H2B ISA while there are only four LISA providers. Further, the H2B ISA rates are much more attractive, despite falling in recent months. The current best buy comes from Barclays and pays 2.27%, which is much more attractive than the 0.5% offering from Skipton.
Nelson says: “With the H2B ISA still available and rates on these paying significantly more than the Skipton deal, savvy savers would be wise to open a H2B ISA and transfer when the deal ends if required.”
The H2B ISA scheme is open for new savers until 30 November 2019. Those who’ve already opened one before this date can continue saving into it until 30 November 2029. See YourMoney.com’s Should I transfer my Help to Buy ISA to a Lifetime ISA? for more information on this.