Credit Building > How a Lifetime ISA Can Help You Buy Your First Home

How a Lifetime ISA Can Help You Buy Your First Home

Wollit Team6 minute read · Updated 21st March 2025

How a Lifetime ISA Can Help You Buy Your First Home

Looking to save for your first home? A Lifetime ISA could be your path to homeownership, offering a significant government bonus to boost your deposit savings. This savings option has become increasingly popular among first-time buyers looking to get onto the property ladder more quickly.

What is a Lifetime ISA?

A Lifetime ISA (LISA) is a government-backed savings account designed to help individuals save for their first home or retirement. It offers a substantial incentive in the form of a government bonus, making it an attractive option for those looking to build a house deposit.

You can save up to £4,000 per year, and the government adds a 25% bonus to your contributions, up to £1,000 annually. This means that if you deposit the maximum amount, you'll receive an extra £1,000 from the government each tax year – essentially free money towards your first home.

LISAs can hold either cash or stocks and shares, depending on your savings goals and risk tolerance. Cash LISAs offer lower risk and guaranteed returns, while stocks and shares LISAs have the potential for higher growth but come with increased risk.

Eligibility for a Lifetime ISA

To open a Lifetime ISA, you must be a UK resident aged between 18 and 39. This age restriction is important to note – you cannot open a LISA once you turn 40, so planning ahead is essential if you want to take advantage of this savings vehicle.

Contributions can be made until the age of 50, but the government bonus stops after this point. This gives eligible savers up to 32 years of potential government bonuses if they open an account at age 18.

First-time buyers are eligible to use their LISA savings to buy your first home. To qualify as a first-time buyer, you must never have owned a property anywhere in the world, including inherited properties or those you've owned with someone else.

Lifetime ISA Rules for First Home Buyers

The Lifetime ISA comes with specific rules for those using it to purchase their first home:

The property must cost £450,000 or less. This is a hard limit that applies regardless of location, so it's particularly important to consider if you're buying in more expensive areas like London or the South East.

You must have held the LISA for at least 12 months before using it for a home purchase. This means you should plan ahead and open your account well before you intend to buy.

The purchase must involve a mortgage, and funds are paid directly to a solicitor or conveyancer. You cannot use your LISA for a cash purchase or receive the money directly.

If buying with someone else, they can also use their LISA savings if they meet the eligibility criteria. This is particularly beneficial for couples who are both first-time buyers.

Building a strong credit profile while saving in your LISA can help you secure better mortgage terms when you're ready to buy. Tools like a Wollit credit builder can help improve your creditworthiness alongside your savings efforts.

Benefits of a Lifetime ISA for First-Time Buyers

The 25% government bonus significantly boosts your savings, making it easier to afford a deposit. This bonus is applied monthly, meaning your money grows faster than in a standard savings account.

Savings grow tax-free, whether held in cash or invested in stocks and shares. This tax advantage enhances the overall return on your savings, especially for higher-rate taxpayers.

LISAs are flexible, allowing you to save at your own pace while still benefiting from the bonus. You can make lump sum deposits or regular contributions up to the £4,000 annual limit, depending on what works best for your financial situation.

The scheme is particularly beneficial for those with a longer-term view to buying, as it allows several years of bonus accumulation. For example, saving the maximum amount for four years would give you £16,000 of your own money plus £4,000 in government bonuses – a substantial £20,000 towards your deposit.

Lifetime ISA Withdrawal for First Home Purchases

Funds can only be withdrawn penalty-free for a first home purchase, after age 60, or in cases of terminal illness. This restriction ensures the account serves its intended purpose of supporting home purchases or retirement.

For unauthorised withdrawals, a 25% penalty applies, which could result in losing more than the government bonus. This penalty means you could get back less than you put in, so it's crucial to be certain about your plans before opening a LISA.

The withdrawal process involves your solicitor coordinating with your LISA provider to ensure compliance with the rules. Once your offer is accepted on a property, your solicitor will request the funds directly from your LISA provider, who will then confirm eligibility before releasing the money.

Understanding these withdrawal rules is essential when planning your home purchase journey, as they affect how and when you can access your savings.

Comparing Lifetime ISA vs Help to Buy ISA

The Help to Buy ISA is no longer available for new applicants, but existing accounts can still be used. If you're deciding which to focus on, there are several key differences to consider:

Unlike the Help to Buy ISA, the Lifetime ISA allows you to save more annually (£4,000 vs £2,400) and offers a higher property value limit (£450,000 vs £250,000 outside London and £450,000 in London).

The Lifetime ISA can also be used for retirement savings, providing additional flexibility if your plans change or you want to continue saving after purchasing your home.

With a Help to Buy ISA, the bonus is claimed after your offer is accepted, whereas the LISA bonus is added monthly, allowing your savings to grow faster through compound growth.

However, the Help to Buy ISA doesn't have the 12-month waiting period that applies to the LISA, so it might be more suitable for those looking to buy very soon.

When planning for your first home purchase, it's also worth considering how other factors like your credit score affect mortgage approval alongside your deposit savings strategy.

Tips for Maximising Your Lifetime ISA Savings

Start saving early to maximise the government bonus over time. The longer your money is in the account, the more bonus you'll accumulate and the more time your investment has to grow if you've chosen a stocks and shares LISA.

Set up regular contributions to ensure you reach the £4,000 annual limit if possible. Automating your savings makes it easier to stay consistent and avoid missing out on potential bonuses.

Consider whether a cash or stocks and shares LISA aligns better with your financial goals. If you're planning to buy within five years, a cash LISA might be more appropriate due to its lower risk. For longer-term plans, a stocks and shares LISA could potentially offer better returns.

Use tools like the Wollit credit builder to improve your financial standing while saving for your first home. A strong credit score alongside a healthy deposit will put you in the best position when applying for a mortgage.

Remember that the LISA is just one component of your overall financial plan. Consider how it fits with your other savings, investments, and financial goals.

Lifetime ISA Property Value Limit and Other Restrictions

The £450,000 property value limit applies regardless of location in the UK. This is an important consideration, especially for those buying in high-value areas where this limit might restrict your options.

Shared ownership properties are eligible, but the total property value must not exceed the limit. This can make the LISA particularly useful for those entering the property market through shared ownership schemes.

Houseboats and other non-land-based properties are excluded from LISA eligibility. If you're considering unconventional property types, you'll need to check if they qualify before planning to use your LISA funds.

The property must be in the UK and must be your main residence – you cannot use a LISA to fund a buy-to-let investment or holiday home.

Understanding these restrictions is crucial when planning your property purchase to ensure your LISA savings can be used as intended.

Lifetime ISA Benefits Beyond Home Buying

If you don't use your LISA for a home purchase, it can still be used for retirement savings after age 60. This dual-purpose nature makes it a flexible option for young savers who are uncertain about their future plans.

The tax-free growth and government bonus make it a valuable long-term savings tool. Even if your plans change, your LISA can continue to grow and provide financial benefits for your future.

Combining a LISA with other savings strategies can help you achieve broader financial goals. For example, you might use a LISA alongside a pension, other ISAs, or investments to create a comprehensive financial plan.

The LISA can also serve as a backup retirement fund, offering tax-free withdrawals after age 60 that complement other pension provisions.

For those focusing on improving their credit profile while saving for a home, a LISA offers the additional benefit of demonstrating consistent saving habits, which can positively influence lenders' perceptions of your financial responsibility.

Conclusion: Is a Lifetime ISA Right for Your First Home Purchase?

A Lifetime ISA offers significant advantages for first-time buyers, particularly through the government bonus that effectively gives you a 25% return on your savings. However, it's important to consider the restrictions and ensure they align with your home-buying plans before committing.

If you're between 18 and 39, planning to buy a property under £450,000, and have at least a year before you intend to purchase, a LISA could be an excellent vehicle to accelerate your deposit savings. When used alongside strategies to improve your credit profile and overall financial health, it can significantly enhance your path to homeownership.

Remember that financial planning is personal, and what works for one person may not be ideal for another. Consider consulting with a financial advisor to determine if a Lifetime ISA fits well with your specific circumstances and goals.

With careful planning and strategic use of the Lifetime ISA, you can put yourself in a stronger position to achieve your dream of owning your first home.