ISAs are one of the most popular forms of savings account in the UK, according to recent data from the government there were around 12.5 million adult ISAs in operation in the 2022-23 financial year.
But there are concerns that one form of ISA, specifically aimed at the housing market, is handcuffed by limitations on its use, holding back the chances of first-time buyers.
We need to talk about LISA
The Lifetime ISA, otherwise known as the LISA, was supposed to give hopeful homeowners a helping hand, but it’s open to debate just how effective it is currently.
The government tops up the money saved into the Lifetime ISA each year by up to £1,000, on top of the interest paid, providing a boost to the deposit and – in theory – making that first step onto the housing ladder easier.
However, there are worries that the Lifetime ISA isn’t keeping up with the pace of the market. Under the rules, the LISA cash cannot be used towards the purchase of a property costing more than £450,000. That cap was introduced back in 2017, and since then there has been a significant growth in house prices, which has inevitably limited the number of homes the product can apply to.
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Research from AJ Bell suggests that by the end of this parliament, buyers will be “frozen out” of using a LISA to buy a terraced house in 54 regions, while 17 regions will be out of bounds for flat purchases.
As the firm points out, while the LISA wasn’t designed to support the purchase of homes in salubrious areas like Kensington or Fulham, Watford, Welwyn and Barnet should not be off limits.
Understanding the deposit challenge
It’s no secret that building a deposit is one of the toughest challenges faced by those hoping to purchase a property, but that challenge has undeniably got tougher over the last few years.
First and foremost, the size of the deposit needed has grown substantially, as house prices have risen. Over the last year, they have grown by 2.9% on average, according to data from the Office for National Statistics, continuing their seemingly unstoppable upward trajectory.
House price growth has coincided with household budgets becoming ever more stretched, with buyers facing rising outgoings on their bills.
This leads to a perfect storm in that prospective buyers need to save a bigger deposit, while seeing the wriggle room in their budgets evaporate. And even if they manage to save a decent sum in their LISA, they may not be able to devote that money towards the property they want.
It’s a painful combination.
Delivering more options
Given the obvious challenges around raising a sizeable deposit, and the limitations of the LISA, it’s crucial that borrowers have a decent range of high loan to value (LTV) products from which to choose.
There is some positivity on this front, according to the most recent data from Moneyfacts. It found that the number of 95% LTV products on the market in December reached 365, up from 358 the month before. It’s also substantially up from the typical number seen in recent years – back in November 2022, in the aftermath of the Liz Truss mini-Budget, there were just 141 deals available to those with a 5% deposit.
However, they remain relatively rare, given there are nearly 6,500 mortgages overall on the market.
More support for first-time buyers
If we are serious about making things easier for first-time buyers, then clearly some changes are required.
Addressing the housing shortage would be welcome, since it’s that imbalance which is such a significant driver of house price growth. And while the new government has ambitious ideas about building more homes, doing so will take time.
If we are to have schemes aimed at boosting the saving of a deposit, then they need to be as effective as possible. Reviewing their caps and limits, and keeping them up to date with the market, makes sense.
But lenders also have a central role to play here. It’s not enough to talk about wanting to help first-time buyers – we have to prove it through our actions. It’s something that we take seriously at Atom Bank, not only through our range of 95% products but by adapting criteria when necessary to deliver support for buyers in areas who might particularly benefit.
As an industry, we need to go further and be more innovative if we are to ensure that the first rung of the housing ladder is genuinely accessible to those who want to get on.
