The biggest investment most people make in their lives is usually buying a home. It has always been however, an ambitious thing to do, and now, in 2017, more so than ever. Below Finance Monthly hears more on the risks of a lifetime ISA from Stefano Giudici, Marketing Manager at Money Farm.
For young people aspiring to buy their first home, speculation about a future slump in house prices could be good news, but for those people who have only just started saving for a deposit, a fall in house prices in the immediate future will come too early.
Average property prices and minimum mortgage deposits
Generally speaking, the smallest deposit to secure a mortgage is 5%. Most lenders are currently asking for a minimum deposit of 10%. According to Halifax, and as reported on the BBC website, the average UK house price fell to £218,390 in June. This means that as a minimum, a deposit of nearly £22,000 would be required.
Of course the larger the deposit you can put down, the small the mortgage; so it’s advisable to save as much, as quickly as you can in order to make mortgage repayments affordable. The best mortgage deals you can make at present require a whopping 40% deposit.
The new lifetime ISA
The government has stepped into the picture to try and help first time buyers by launching the Lifetime ISA or LISA for short. This is a new platform that is designed to take over from the current Help to Buy ISA. To be eligible for the new LISA you must be aged between 18 and 39 years old.
If you do use your LISA to help you to buy a house valued at up to £450,000, the government will add a 25% bonus. The only problem is that if you have to withdraw anything from your LISA for emergency expenditure before you buy a property, the penalty is severe. It amounts to 25%, all of which has to be paid to HMRC.
Beware of accessing LISA investments before you buy a house
The problem for many people who want to invest in their future is that they do not have much disposable income. If all their savings are tied up in a LISA they will have no choice but to access them if an emergency or unforeseen situation arises. This could cost them dear and make a big hole in their home purchase plans.
It is because of this that the FCA advises that investors should only opt for a LISA when they are confident they will not need to access their investment before buying a first home.
LISAs can also be used as an investment for retirement. However, in this context, this 25% penalty can also catch you out if you have to access your savings before you’re 60.
Advice from the FCA
What this means is that for many people, investing in a LISA might not be wise. They would be far better off by using another platform such as a stocks and shares ISA. Although there is no government bonus, the gross total AER would, over a period of time, probably exceed what you would have been given in the way of the government bonus.
The beauty of a stock and shares ISA also is the fact that you can access your investment if you need it, without penalty, in something like 5 to 7 days on average.
What it all amounts to is that you need to be aware of the advantages and the pit-falls that the various investment platforms have. The best thing to do before you commit yourself is to seek advice from an IFA.