Getting on the housing ladder not only means saving for the future, but also being mindful of where you put those savings. If you’re keen to get the most return from your savings, you may be considering a Help to Buy ISA vs a Lifetime ISA.
Our in-depth guide explains everything you need to know about Help to Buy and Lifetime ISAs, pros and cons and key considerations before you make a decision.
What is an ISA?
Referred to as ISAs, individual savings accounts help you to either save cash or invest. Today, there are many types of ISAs available, but no matter which type you choose, they’re all tax-efficient.
For example, if you earn interest on your cash ISA, you won’t have to pay Income Tax on it. And, if you own a stocks and shares ISA, there’s no Capital Gains Tax to pay if you make a profit from any of your investments.
What is a Lifetime ISA?
First introduced in April 2017, LISAs or Lifetime ISAs are a type of cash ISA backed by the government to help people become first-time homeowners. There are many different types to choose from such as investment and cash options. You can even use a cash LISA to save for retirement.
How does a Lifetime ISA work?
When you save into a Lifetime ISA, the government gives you a 25% bonus based on how much you put in. The government pays your bonus monthly, with funds available to you when you exchange contracts during the purchase of your new home.
How much can I save into a Lifetime ISA per tax year?
You have an annual ISA allowance of £20,000 for 2022/23. This amount can go into a cash ISA, a stocks and shares ISA, or even spread across both accounts.
But, you can save up to £4,000 into your Lifetime ISA each tax year and any government bonus you earn won’t count as part of this limit. You’ll also be able to pay into your LISA until you reach age 50. After that, you can still earn interest on your savings.
How do I qualify for a Lifetime ISA?
To qualify for a Lifetime ISA, you’ll need to be between 18-39 years old and either a Crown servant or UK resident.
And if you’d like to use your LISA to buy your first home, you must meet the following criteria:
- Your home will be your main residence, not a holiday home or rental property
- Your home’s purchase price must be no more than £450,000
- You don’t already own or have previously owned a home in the UK or elsewhere
- You must use a repayment mortgage
Lifetime ISA pros
- You can use a LISA to buy a home that’s priced up to £450,000 (throughout the UK and even London)
- You can combine LISAs with your partner, provided you’re both first time buyers
- You’ll get a 25% government bonus up to £1,000 per tax year
- The government pays your bonus monthly, giving you a chance to earn more interest
- Your bonus can be used towards your deposit if you exchange contracts for a home in England, Northern Ireland and Wales
- If you’ve found a home in Scotland, your solicitor will handle the Help to Buy Bonus application for you
- You can also access money in your LISA tax-free if you’re aged 60 or have a terminal illness
- You can have more than one LISA, but can only pay into one during a tax year
- You can choose between a cash or stocks and shares Lifetime ISA
- You could get a maximum bonus of £32,000 if you saved £128,000
- You can combine your bonuses if you’re buying your home with another first-time buyer who has a Lifetime ISA
Lifetime ISA cons
- You’re not allowed to put money into your LISA once you reach age 50
- If you withdraw funds before you reach age 60 for a reason that’s not buying your first home, you’ll face a 25% government charge
- You’ll need to wait for a minimum of a year to claim your government bonus if you’re buying a home in Scotland
- Closing your account during the ‘cooling off period’ means you won’t be eligible for the government’s 25% bonus
What is a Help to Buy ISA?
The government announced the Help to Buy ISA scheme in 2015 as a way to help people save up for a deposit to buy their first homes. As of 30 November 2019, you can no longer open a Help to Buy ISA account.
How does a Help to Buy ISA work?
A Help to Buy ISA works like a Lifetime ISA in that the government tops up your contributions by 25%. For example, if you save £10,000, you’ll get a £2,500 government top up.
You’ll receive your bonus when you buy your first home and the funds will be available upon completion. The bonus can be used towards your mortgage deposit, but not the deposit you hand over when you exchange. This is because you receive the bonus after completion.
How much can I save into a Help to Buy ISA per tax year?
You can save up to £12,000 into a Help to Buy ISA and get a maximum bonus of £3,000.
How do I qualify for a Help to Buy ISA?
If you’d like to qualify for the government bonus, you’ll need to ensure that:
- You’re buying a home in the UK
- Your home’s purchase price is no greater than £250,000 (for most UK areas) or £450,000 if it’s in London
Again, you can no longer open a new Help to Buy ISA account. But, if you already have one, you can continue to save into your ISA until 30th November 2029. You’ll also have until November 2030 to claim your government bonus.
Help to Buy ISA pros
- Your government bonus can be claimed at any time as long as you’ve saved at least £1,600 and less than £12,000
- You can reopen your ISA account if your home purchase falls through as long as you give your provider a Purchase Failure Notice (PFN)
- You can save £200 into your Help to Buy ISA each month and earn interest on your savings
- You can use your government bonus towards a shared ownership property
- There are no fees to pay
Help to Buy ISA cons
- You can no longer open a new Help to Buy ISA account
- You’ll need to wait at least four and a half years to qualify for the maximum £3,000 government bonus
- You won’t get the government bonus until you purchase your property
- You don’t earn interest on your bonus as you do with a LISA
- Your solicitor or conveyancer must claim your government bonus on your behalf
- You’re only allowed to have one Help to Buy ISA account
- You’re able to withdraw your money anytime, but you won’t receive the bonus if it’s not used to buy your first home
Choosing between a lifetime vs a Help to Buy ISA
What to consider before making a decision
You should now have a better idea of what Lifetime and Help to Buy ISAs are. But, before you start searching for providers and options, it's key to understand your options.
Let’s explore key considerations to help you make your decision on which type of ISA to buy your first home with.
Where can you get a Help to Buy or Lifetime ISA?
As mentioned above, this type of ISA is no longer available and isn’t offered by any providers. But you can still open a LISA account with a bank, credit union, building society and other providers.
Can I transfer a Help to Buy ISA or Lifetime ISA?
It’s possible to transfer your Lifetime ISA to another provider. If you currently have a Help to Buy ISA, you can also transfer the funds within it into a LISA. No matter which type of ISA you hold, check that your potential new provider accepts this type of transfer.
You should also keep in mind that transferring money from another account will count towards the maximum £4,000 amount you can pay in during the tax year.
Can I have a Help to Buy ISA and a Lifetime ISA?
It is possible to have and save into a Help to Buy and a Lifetime ISA. But, as each type of ISA has different rules and benefits, you may find one more beneficial than the other when buying your first home.
Whichever you choose, be aware that you can only claim one bonus to help you buy your first home. If you’re unsure of what to do, it may be worth considering getting professional financial advice.
Get expert advice on your ISA options
We hope this guide has helped you gain a better understanding of how Lifetime ISAs and Help to Buy ISAs can help you get on the property ladder. But, as with all big financial decisions, it’s always worth considering all your options - especially when saving to buy your first home.
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