Are you better off with a Help to Buy ISA or a Lifetime ISA?
The end of the Help to Buy ISA
The Government’s Help to Buy ISA was a part of their Help to Buy scheme to aid first-time buyers with getting onto the property ladder.
The Help to Buy ISA closed permanently to new applications on 30th November 2019, meaning that it is no longer a savings option for first-time buyers who haven’t already opened an account with them.
Another option available is the Lifetime ISA (LISA), which provides similar benefits but also varies in a lot of ways.
As the LISA is less well known, we think people will appreciate a comparison between the two to see what there is to gain/lose from having a LISA over a HTB ISA.
Introducing the Lifetime ISA
The Lifetime ISA (LISA) lets you save up to £4,000 every tax year while you’re between the ages of 18 to 39.
These savings can be used for:
- Buying your first home
- Saving for your retirement
The government will contribute 25% of these annual savings, so saving the annual maximum of £4,000 will get you a bonus of £1000 each year.
If you saved the maximum amount every year from age 18 to 39, you would receive a total of £33,000 in contributions from the government towards either your first home or your pension
If you have a help to buy ISA
What happens to it?
It will continue as normal for the next 10 years. You have until November 2029 to save into your account
You can transfer the funds to a Lifetime ISA at any point. These will count towards the £4,000 limit, so you would only be able to move £4,000 per year.
You would lose the 25% Help to Buy bonus, however you would still be eligible for the 25% LISA bonus.
Would I be better off with a Help to Buy ISA or a Lifetime ISA?
LISA Pros:
- Can receive gvt bonus of £1000 / year
- Absolute maximum bonus is £33,000
- Can invest in stocks/shares
- Bonus is paid monthly
- Can pay the annual maximum in a lump sum
- Can choose to use for first home or retirement
Cons:
- Hefty penalty for withdrawing under age of 60
- Need to wait 12 months after opening before using it
Help to Buy ISA Pros:
- No penalty for withdrawal (you still don’t get the bonus, though)
- Can use after 3 months if you have made maximum use of savings
Cons:
- Max Gvt bonus is £600 / year
- Absolute maximum bonus is £3,000
- Can’t invest in stocks – cash only
- Must pay monthly
Analysis
Let’s consider two scenarios:
Scenario 1
The average first-time buyer deposit in 2018 was £32,841 according to research by Halifax. Let’s assume you are an average first-time buyer, looking to purchase a £330,000 property on your own with a 10% deposit (£33,000).
To reach this deposit using the help to buy scheme, you would need to have saved a minimum of £30,000, with the govt contributing the other £3000.
To reach this deposit with a LISA, you would only need to save £26,400, and the government would contribute £6,600 to help you reach £33,000.
Scenario 2
All your savings (£8,000) are currently in an ISA, and the government has contributed £2,000 (25% of 8,000), bringing your total to £10,000. Your personal circumstances require an emergency withdrawal of as much money as possible.
If it’s a Help to Buy ISA: You lose the government bonus (£2000) and can withdraw the remaining £8,000.
If it’s a Lifetime ISA: You are charged 25% of the withdrawal (£2,500), and receive the remaining 75% (£7,500). This is £500 less than what you had put into the ISA.
Conclusion
When applying for a mortgage, the Lifetime ISA is likely to give you better value for money, however you must be aware how the potential drawbacks will relate to you.
To get a better understand of what is right for your situation, you can arrange a free consultation with one of our advisers below