Lifetime ISA or Help to Buy ISA? What You Need to Know

Posted 28 May 2019 by Nick Parkhouse

Want to save your house deposit? Here are the pros and cons of Lifetime ISAs & Help to Buy ISAs and what you should know...

If you’re saving up for the deposit for a home, you’ve probably considered putting your money into an Individual Savings Account (ISA).

There are lots of different types of ISAs available, and two of the most popular for people looking to save to buy a home are the Help to Buy ISA and the Lifetime ISA. Offering tax-free saving, they are a useful way of building up a lump sum.

New figures have revealed which is the most popular ISA for new savers. But what are Lifetime and Help to Buy ISAs? What benefits do they offer? And which is likely to be better for you? Keep reading for answers to these questions and more in your complete guide to Lifetime and Help to Buy ISAs.

What is a Lifetime ISA?

Since April 2017, people between the ages of 18 and 40 have been able to start a new Lifetime ISA (LISA). The aim of the Lifetime ISA is to encourage people to save tax-free for the deposit for their first home, and/or for their retirement.

You can invest a maximum of £4,000 into a Lifetime ISA each tax year, but the contribution forms part of your overall £20,000 annual ISA allowance. So, if you maximise your Lifetime ISA each year you can still pay up to £16,000 into other ISA products.

One of the main advantages of a Lifetime ISA is that you are paid a 25% bonus by the government based on the amount you save. As the maximum contribution each tax year is £4,000 the maximum bonus you can earn in a tax year is £1,000.

To open a Lifetime ISA, you must be between the ages of 18 and 30, and a UK resident or Crown servant. You can carry on paying into a Lifetime ISA until you are 50.

If you plan to use your Lifetime ISA to buy your first home, there are some factors to consider:

  • You can’t have owned a property before
  • You must be planning to live in the property (a Lifetime ISA can’t be used for a buy-to-let property)
  • The maximum property purchase price is £450,000
  • You must use a traditional repayment mortgage.

If you are planning to buy your first home with a partner, and you both meet the criteria above, you can each open a Lifetime ISA and each benefit from the government bonus.

You can access the money in your Lifetime ISA (including the bonus) if your account has been open for at least 12 months and you’re buying your first home.

If you’re saving for retirement, you can access your money and the bonus if you reach the age of 60 or you’re diagnosed with a terminal illness.

If you withdraw your money for any other reason, you’ll pay a withdrawal charge of 25% of the amount you withdraw. As this amount includes the bonus, you could end up withdrawing less money than you saved.

What is a Help to Buy ISA?

In order to help first-time buyers to save up a deposit for their home, the government introduced the Help to Buy ISA in 2015.

You can contribute up to the limit of £12,000 and for every £200 you save (assuming a minimum saving of £1,600), the government will contribute £50. So, if you save the maximum into your Help to Buy ISA, the government will add £3,000.

You can start your Help to Buy ISA with an initial deposit of up to £1,000. This also qualifies for the additional 25% government boost.

You must be aged 16 or over and have never owned a property anywhere in the world. If you’re buying with a partner who has also never owned a property you can each open a Help to Buy ISA and each benefit from the government contribution.

Your solicitor or conveyancer applies for the government bonus once your offer on a property is accepted. Once they receive the government bonus, it will be added to the money you’re putting towards your first home.

You can use a Help to Buy ISA to buy any home worth up to £250,000 (or up to £450,000 in London) and you can use any mortgage, not just a Help to Buy mortgage. You must be planning to live in the property.

Help to Buy ISAs will be available until 30 November 2019. If you opened your Help to Buy ISA before then you can keep saving into your account although you have to claim your government bonus by 1 December 2030.

Figures show that Lifetime ISAs are seven times more popular than Help to Buy ISAs

Both the Lifetime ISA and Help to Buy ISA offer similar benefits. However, new research from a leading building society has revealed that Lifetime ISAs are significantly more popular than their counterparts with new savers.

Figures from the Nottingham Building Society show that the Lifetime ISA is up to seven times more popular with new savers than the Help to Buy product.

Jenna McKenzie Day, senior savings manager at The Nottingham says: “We’re not surprised by the statistics because we know LISA is a genuinely beneficial account that in many cases is helping people buy their first home sooner.

“A large majority of those opening a LISA with The Nottingham are first-time buyers planning to use the funds for their first home. That means potential bonuses of up to £1,000 a year are available for every £4,000 saved.”

Since the start of 2019, the mutual has seen over seven times as many Lifetime ISAs opened compared to Help to Buy ISAs with the gap expected to grow wider as the deadline for opening a Help to Buy ISA approaches.

McKenzie Day adds: “Although there are more first-time buyers opening the account, it doesn’t mean they won’t turn into retirement savers. That’s why it’s called a Lifetime ISA – you can continue saving into it once funds have been used for a house purchase.

“Switching to a long-term savings goal means people can continue to benefit from the government bonus payments and work towards boosting their retirement pot with the same account.”

 

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