Should I open a Lifetime Isa?

A reader asks if he should open a Lisa for a house purchase when he has little credit history

I am in my late 30s and don’t own my home. I am considering opening a Lifetime Isa (Lisa) before I turn 39 and using it to save and fund either my retirement or a house purchase. Am I taking a risk in putting money into a Lisa when there is no guarantee that I can get a mortgage?

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I am concerned as I don’t have much credit history, having never had a credit card, and in recent years I’ve lived in a property where all utility bills were covered by my partner’s employer.

Initial diagnosis

Scott Gallacher, director of wealth manager Rowley Turton, believes your first task should be checking your credit score through specialist companies such as Equifax or Experian.

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You can quickly sign up with either company and download a free credit report to see exactly what information they hold on file about you.

Once you know what potential lenders will learn about your financial history, you can see if there are any mistakes or issues that may cause you problems.

• Generous bonus for first year's Lifetime Isa savers

Mr Gallacher says: Martin Bamford, managing director of financial planning firm Informed Choice, agrees your poor credit rating might negatively impact your ability to get a mortgage but suggests there are steps you can take to improve this in a relatively short period of time.

“The act of borrowing money and paying it back reliably is all it takes to build a credit history,” he says.

For example, applying for a credit card and store card to use for a few purchases and paying both back in full before any interest charges are applied will help your case in the future.

“You are also likely to have a credit history if you have owned a mobile phone on a contract basis,” he adds.

Treatment plan

However, regardless of the outcome of your credit history research, Mr Gallacher insists this shouldn’t deter you from putting money away.

“The key advantage of a Lisa is that it can be used for buying your first home or being available tax free from age 60 to help fund your retirement,” he says. “Consequently, even if you can’t get on the property ladder it will still be a helpful part of your long-term planning.”

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Mr Bamford also concludes that it makes sense to open a Lisa before you reach the 40-yearsold age limit if a home purchase is a possibility.

“You can then continue to contribute through to your 50th birthday and receive the 25% government bonus on contributions each year up to £4,000,” he says.

Alternative treatment plan

However, there are other factors to consider before opening a Lisa. The risk you are concerned about refers to the withdrawal penalty, points out Danny Cox, a chartered financial planner at investment firm Hargreaves Lansdown.

“A Lisa receives an annual bonus of £1,000 for every £4,000 saved, but if withdrawals are made other than to buy a first house, or before age 60, a 25% penalty applies,” he says.

So, if you don’t buy a house, there is no risk from a withdrawal penalty as long as the Lisa savings are held until age 60.

• Is it time to switch your Help to Buy Isa to a Lifetime Isa?

That said, Mr Cox concludes: “In my view, it would be a good idea to open up a Lisa before age 39, using the minimum balance, so you have the option to save more later.” It’s also worth speaking to a mortgage adviser who can assess your situation, points out Alistair Cunningham, a chartered financial planner at Wingate Financial Planning.

“It is possible for two people to use a Lisa to buy together, so a joint mortgage might be possible,” he says.