First-time buyers debating the pros and cons of the Lifetime ISA or Help to Buy ISA to save for their deposit are being offered guidance in selecting the best account.
The beginning of April marks the end of the current tax year, which is also the time people start looking at filling their ISA allowance.
The tax-free Individual Savings Accounts (ISAs) provide a way to save money whilst protecting the interest from the tax man. So, all the cash you save can be put towards your home deposit.
However, there are two ISAs which have been created specifically with first-time buyers in mind and these not only provide tax-free interest but a Government bonus to give your savings pot a boost.
Now Laura Suter, personal finance analyst at investment platform AJ Bell, is offering a comparison of the different products to help first-time buyers choose which ISA will best support their needs.
She said: “The right one for you depends on a number of factors, including where you’re buying, how long you have until you buy your first home and how much money you want to put away each year.”
Help to Buy ISA deadline
One factor potential deposit savers should consider is that from 30 November, no one can open a Help to Buy ISA account because the scheme will end on this date. However, if you already have an account, or open one before this date, you can continue paying into it for another decade and you have until 1 December 2030 to claim your Government bonus.
Is there an age limit?
You need to be aged between 18 and 40 to open a Lifetime ISA. If you are over the age of 40 your only option is to use a Help to Buy ISA to open your first property.
What are the limits for each ISA?
You can save up to £4,000 a year into the Lifetime ISA, compared to the Help to Buy ISA where you can save up to £200 a month, plus an extra £1,200 in the first month of opening the account.
Which offers the best bonus?
Both the Help to Buy ISA and Lifetime ISA benefit from a 25% Government bonus. With the Help to Buy ISA it is limited to the first £12,000 saved – so there is a maximum bonus of £3,000.
With the Lifetime ISA you can get up to £1,000 a year in Government bonus, up until the age of 50. If you opened a Lifetime ISA at age 18, you’ll receive a maximum Government bonus of £32,000 (or £33,000 if you’re lucky enough to have your 18th birthday before 6th April).
What if I don’t have much time to save?
Need to buy in 12 months? Suter said you should use a Help to Buy ISA in this situation. “You must have the Lifetime ISA open for 12 months before you can use the money to buy your first home,” she explained. “This means if you plan to buy in the next year, you should use a Help to Buy ISA, which doesn’t have this restriction.”
Which is best for investing a lump sum?
You can invest a lump sum in a Lifetime ISA but a Help to Buy ISA restricts you to monthly savings. With the Help to Buy ISA you are limited to saving £200 a month.
If you miss a month, you cannot pay double in the next month, Suter explained. With the Lifetime ISA you can contribute up to £4,000 a year, in one or more lump sums or as a regular monthly saving.
Will the location make a difference?
If you are buying in London, a Help to Buy ISA can be used on a property worth £450,000 in London but only on a property worth £250,000 outside the capital.
With the Lifetime ISA there is a limit of £450,000, regardless of the area in which you are buying.
What interest will I earn?
If you are using cash savings rates, the Help to Buy ISA rates are higher, said Suter.
There are three cash Lifetime ISA providers – Newcastle Building Society, which pays 1.1% interest, Skipton Building Society, which pays 1% a year, and Nottingham Building Society, which pays 1% but is currently only available in branch.
According to Moneyfacts, the best Help to Buy ISA cash rate is currently 2.58% from Barclays. However, the higher annual limit, and so higher Government bonus, wipes some of this advantage out, said Suter.
With Lifetime ISAs, however, you can hold your investment in the stock market, through funds, shares, investment trusts or ready-made portfolios.
Suter said: “This means if you are saving your money for longer you have the potential to generate greater returns by investing.”
How will I access the money when it comes to buying a property?
The Help to Buy ISA Government bonus is only issued after you have exchanged on a property, so cannot be used for the initial deposit, which has to be handed over at exchange.
With a Lifetime ISA the Government bonus is paid monthly, meaning it can be used towards your deposit at exchange.
What if I change my mind?
With the Help to Buy ISA, if you change your mind or what to make a withdrawal for something other than your first home, you can redeem your money and you will not have to return any money as the Government bonus will not have been paid.
With the Lifetime ISA, if you need to withdraw money for anything other than a home, retirement or if you have a terminal illness, you pay an exit fee.
Suter said: “This is intended to claw back the 25% Government bonus, but it actually results in you losing the Government bonus and paying a 6.25% fee on top.”
