Being a first time buyer or a homeowner is one of the most significant investments anyone can make, and so, if you’re contemplating buying a home, you’re on the right track. Yet, it can be really challenging when it’s your first time; especially when it comes to gathering your pounds one day after another until it gets to a lump sum.
But, have you considered using a first-time buyer mortgage? It’s a kind of home loan for first-time buyers, and the best part is that it comes with perks to encourage you on your big move.
Now, here’s another hurdle – saving up your deposit. But, don’t freak out yet! Successful home buying is all about having the right information, and here we’ve gathered all the need-to-knows to guide your home buying journey.
First Time Buyer in the UK
Who is a First Time Buyer?
In the UK, a first-time buyer who may also be referred to as a first time homebuyer is someone who has never owned a home anywhere in the world either for residential purposes or lease. Breaking it down, you’re a first-time buyer if you’ve not owned a residential home or a buy-to-let property with or without a mortgage. Also, you must have not owned any property by inheritance.
The law also excludes commercial property such as shops or offices. So, if you’re buying a property to serve as a workshop, office, warehouse, etc, you’re not considered a first-time buyer. In summary, you’re a first-time buyer if you’re buying a residential home for the first time.
First-time buyers in the UK enjoy some benefits from specific schemes to encourage them in the daunting process of buying their first home. An example of such a scheme is a first-time buyer mortgage.
What is a First Time Buyer Mortgage?
A first-time buyer mortgage is a type of mortgage designed for people who have never owned property. Usually, first-time buyer mortgages allow you to deposit as little as 5% to 10% of the home price.
Several mortgage providers also offer 90% loan-to-value and a few, 95% mortgages. Some mortgage lenders offer attractive packages such as cash backs.
What is a Lifetime ISA and How Does it Work?
A lifetime ISA or LISA is a type of savings account that offers government benefits to individuals saving for buying their first home or retirement. A lifetime individual savings account allows you to save a maximum of £4000 annually. The savings can either be deposited as a whole sum or in bits, whichever works for you.
However, the good thing about saving for a home or retirement in a LISA is that you qualify for a 25% bonus from the state. In other words, you can save up to £5000 every tax year in a LISA. While you contribute £4000, the state adds £1000, that’s 25% of your savings.
Aside from the 25% cash benefit, you earn interest on your savings, which is entirely tax-free. LISA is a tax-advantaged savings account. The goal of the Lifetime ISA is to ease the process of first-time home buying by making the home more affordable.
Practically, you can get a free chunky £1480 each tax year in a lifetime ISA. At this rate, you get close to your home-buying goal faster.
Note that the state bonus is calculated based on your contributions alone, not on your investment growth (interest earned on contributions). However, once the bonus enters your account, it is counted as savings and the next bonus will be calculated based on the entire money in your account.
For example, if you contribute £1000 to your LISA in May and earn a 1% interest, your money becomes £1010. However, the government gives you £250, that’s 25% of £1000.
The bonus is paid only in the year you make contributions to your LISA until you reach the age of 50. The bonus is paid monthly, for each month you contribute, and takes between four and nine weeks to enter your account.
Who Qualifies to Use a Lifetime ISA?
To open a Lifetime ISA, you must be:
- between the age of 18 and 40. However, you can continue paying into a Lifetime ISA until you’re 50.
- a UK resident or a Crown servant or their spouse or civil partner if you live abroad.
Using a Lifetime ISA to Buy Your First Home
Using a lifetime ISA to buy a home is a great idea. However, there are a few restrictions to using the account. To save in a lifetime ISA;
- You must be a first time buyer according to the legal definition. That means you must not have or have owned a home in the UK or outside the UK.
- The home you intend to buy should not cost more than £450,000.
- The home you’re buying must be a residential home and not for commercial purposes like an office warehouse or a shop. The home should not also be for rent. You must plan to live in the home.
- You must buy the home through a traditional repayment mortgage.
Frequently Asked Questions
Can I Contribute to My Lisa and Other ISA Accounts at the Same Time?
The answer is yes. The maximum amount of money you can save in ISA for the year 2022/2023 is £20,000. You can split your contribution between LISA and other ISA accounts. You can also have a Help to Buy ISA and a LISA at the same time, though you won’t be entitled to a first-time buyers’ bonus on the two accounts.
Can I Use My Savings for Another Purpose?
You can use your savings in the LISA for a purpose other than buying your first home or retiring. However, this attracts a penalty.
LISA charges you 25% of the amount withdrawn when you withdraw all or some of your savings before the age of 60 and for another purpose.
So, the answer to your question is yes, but be ready to pay a penalty.
Where Can I Open a Lifetime ISA?
There are many options to explore when it comes to choosing a Lifetime ISA. However, you have to ensure that you work with a trusted platform. Moneybox LISA is among the top picks among LISA providers. With the Moneybox app, you can manage your finances: save, invest, buy a home and save for retirement.
The platform also provides you with lots of educational materials to ensure you make the most of your finances.
Conclusion
Buying a home for the first time can be less challenging if you know the right steps to take. Now, you know that you can be highly effective with your savings for home buying by using a Lifetime ISA. A good way to start is to open a LISA account with Moneybox.