Help to Buy ISA vs. Lifetime ISA?
Buying your first home is a huge step and is obviously a very expensive process.
Plenty of people opened a Help to Buy ISA (HTB ISA) back in 2015, when the government first launched this incentive. However, many people who are currently looking to buy a home, missed out due to the scheme ending in 2019.
If you did miss out, don’t worry! There is another great option available to 18–49 year olds, which will still allow you to begin saving towards your first home, and with the same 25% bonus from the government!
As many people already know, HTB ISAs offer first time buyers (FTBs) a 25% bonus on their savings, (tax free!), providing they put their savings towards a deposit for their first home. The price of the purchase can be up to £250,000 (or £450,000 in London).
FTBs can save up to £2,400 per year in their HTB ISA, (or £3,400 within the first year of opening the account), and funds can be withdrawn any time, with the FTB bonus being granted once at least £1,600 has been saved. You can pay into a HTB ISA until November 2029 and can claim the bonus until November 2030.
You can still withdraw funds from you HTB ISA without having to put it towards purchasing your first home, however, you obviously will no longer be eligible for the government bonus.
This all sounds great, however, there are some limitations to the Help to Buy ISA, (especially in comparison to Lifetime ISAs, but we’ll get to that shortly!).
Only £2,400 per year (plus the extra £1,000 in year one) can be saved in a HTB ISA, and only one lump sum deposit in the first month was allowed. Furthermore, FTBs can only deposit £200 per month following this, so if you miss a payment once or twice, you won’t be eligible to save the full amount that year.
In terms of the bonus offered, 25% is a great contribution for First Time Buyers, however, there is a maximum bonus of £3,000… so technically, if you save more than £12,000, you might feel you’re not necessarily getting your money’s worth.
Here’s when we introduce the Lifetime ISA (LISA) – the current alternative to the HTB ISA.
Opening a LISA is easy, (and still possible, unlike the HTB ISA!). You simply need to be aged 18-49 and a FTB, (or be saving for later life).
LISAs can be used in two ways:
- Tax-free savings towards your first home, plus a 25% government bonus.
- Tax-free savings towards your retirement, plus a 25% government bonus.
If using your LISA to save towards your first property, (which we are going to assume you are, due to this being a comparison between HTB ISAs and LISAs for first time buyers), there are a few conditions which differ from the HTB ISA.
The amount you can save per year is much higher, at £4,000 per year, with no monthly limit. This means you could receive a maximum bonus of £32,000! (Although to do so, you would need to pay £4,000 into your LISA every year from age 18-49).
The maximum price of the property bought with your savings is also higher, at £450,000 max, anywhere in the UK. Your government bonus is also paid monthly, meaning you could earn interest on your bonuses as well as your own investments.
There is also an added option with LISAs to invest your money into stocks and shares. This can be a great option if you are willing to take financial risks but remember that investing can leave you with both gains and losses.
Sounds great, right? Here comes the slightly ‘less-great’ part. If you choose to withdraw your funds early, (within 12 months of opening your LISA), you are subject to a withdrawal fee of 25%.
The fee is also applicable if you withdraw for any reason other than buying your first home or retirement. There are exceptions to this, but none that you would hope to qualify for!
This fee will leave you with less than you put in, regardless of whether you hold a Cash ISA, or a Stocks and Shares ISA. You will end up losing around £6.25 per £100 that you have paid in, so consider this if you are thinking about opening an account.
If you are reading this as someone who did manage to nab a HTB ISA between 2015-19, you might be wondering if a LISA might have been a better choice? If you do think you would benefit more from a LISA, it is possible to transfer your savings over from your HTB ISA.
However, the flexibility offered by a HTB ISA, allowing you to withdraw your savings at any time, for any reason, and keep your interest earned, does not transfer to your LISA with your money. So, if you do transfer to a LISA, keep that in mind!
(More information about switching from a HTB ISA to a LISA.)
You can find more information about LISAs here. or more information about HTB ISAs here.
Lily | Sales & Marketing Assistant
DISCLAIMER: This article is for informational purposes only; it is not to be taken as financial advice. If you require financial advice of any kind, please contact us 7 days a week, on 015242 56625 or team@lunevalleyestates.com, so we can refer you to our financial advisors.
