How renters could save towards a house deposit

A new government-backed savings scheme has been designed to make it easier for young people to take their first steps onto the property ladder.

A young couple moving in to their first home with boxes

As pretty much anyone in their twenties or thirties knows, it has become almost impossible to buy a first home without some form of outside financial help. This is one problem the Lifetime ISA has been introduced to help address.

The rise in rent

For those in rented accommodation in particular, this is a big problem. For a start, no one really likes paying their landlords hundreds of pounds each month with nothing tangible to show for it. At the same time, average monthly rents are on the rise. While it’s never been easy for renters to find a significant amount of spare cash to put aside towards a deposit on a home of their own, the situation is just getting worse.

The Official for National Statistics say that private rental prices paid by tenants in the UK rose 1.1 per cent in the twelve months to February 2018. That looks set to accelerate, as the Royal Institute of Chartered Surveyors has predicted that UK rents will rise 15 per cent from July 2018 to 2023.

Costs have risen much more sharply in some parts of the country than in others. Average rent rose 2.4 per cent in the East Midlands and 1.8 per cent in Yorkshire and the Humber, the West Midlands and the South West in the twelve months to February 2019.

How can the Lifetime ISA help overcome these obstacles? The scheme, like other ISAs, allows individuals to put money into cash deposit accounts, shares or investment funds with any returns being tax efficient.

How is a Lifetime ISA different?

The Lifetime ISA differs from standard cash or stocks-and-shares ISAs in two key ways. Firstly, they are available only to people aged between 18 and 39. Secondly, money put into a Lifetime ISA is eligible for a government top-up worth 25 per cent of the total amount saved each year. The annual Lifetime ISA investment limit is £4,000, so Lifetime ISA customers could potentially get an additional £1,000 a year.

The government’s aim in paying this bonus is that the money in the ISA is eventually used either as part of a deposit on a first home, or withdrawn after the holder turns 60 as a supplement to their pension income. Withdrawals made before the age of 60 for purposes other than a deposit on a first home are subject to a 25 per cent government withdrawal charge. This means savers could get back less than they invested.

Cash or stocks & shares

For would-be first-time buyers, the Lifetime ISA is well worth considering given the tax-efficient returns and extra government bonus it offers. These tax advantages do depend on individual circumstances and may change in the future. But for anyone opening a Lifetime ISA, one significant decision concerns whether to put the money into a cash deposit account or invest in the likes of shares and investment funds.

Cash is less risky, but at present interest rates are low - 0.75 per cent in March 2019. Due to inflation, this can mean the value of cash diminishing over time.

Stock-market linked investments carry more risk – their value can fall as well as rise - But they also have greater growth potential for those who are planning to save over a period of around five years or more.

While past performance is no guarantee of future returns, research by Schroders suggests that money put into cash ISAs over the past two decades has grown slower than stocks-and-shares ISAs over the same timeframe. For renters who expect to have to save up their deposit over a relatively long period, therefore, the Lifetime ISA investment option could be well worth a look.

Note: We take care to ensure Talking Finance content is accurate at the time of publication. Individual circumstances can differ so please don’t rely on it when making financial decisions.

Find out more about our Lifetime ISA

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