The introduction of the Help to Buy and Lifetime ISAs make the task of saving for a house deposit a little easier for first-time buyers.
Having two options to help save for a deposit is good news for first-time buyers but it has undoubtedly lead to confusion. While both work in similar ways, with the same aim (helping first-time buyers save for their deposit), there are a number of intricacies that first-time buyers need to be aware of.
Who is eligible?
Help to Buy ISA
Providing you are a first-time buyer over the age of 16, you can open a Help to Buy ISA. There is no maximum age.
The phrase ‘first-time buyer’ in this context means that you don’t already own or part-own a property in the UK.
Lifetime ISA
The criteria is a little stricter for the Lifetime ISA however, with only those aged between 18-39 eligible to open an account. The cut-off point for the current tax year is anybody born before 6th April 1977.
Furthermore, contributions can only be made until the age of 50.
If you are planning to use the savings to help buy your first home, you can’t have ever owned a property in the UK.
It’s worth remembering too, if you inherit a property whilst saving for a deposit with either of the options, you no longer qualify as a first-time buyer and, you can’t use either the Help to Buy ISA or the Lifetime ISA to invest in a Buy to Let property.
How much can you save? And how often?
Lifetime ISA
The Lifetime ISA allows you to save £4,000 per year. This can be a lump sum, or regular payments made over the duration of the year.
Help to Buy ISA
The Help to Buy ISA isn’t as flexible, with a maximum monthly contribution of £200. You are though allowed to contribute a lump sum of up to £1,200 when you open the account, meaning a total limit of £3,400 in the first year.
What’s the bonus? And when is it applied?
The amount of Government bonus is the same for both the Help to Buy and Lifetime ISA.
For every £1 you contribute 25 pence will be added. That might not sound much, but it soon adds up: For every £100 you pay in £25 is added, for every £1,000, £250 and so on.
As we say, it soon adds up and every little helps, as you try and get onto the housing ladder.
Lifetime ISA
The Lifetime ISA has the largest potential for bonus payments, with a maximum of £32,000. This assumes that the account was opened at the age of 18, and £4,000 was paid in each year.
The bonus is paid in each year, which means that you will earn interest from it.
Help to Buy ISA
The Help to Buy ISA has a maximum bonus of £3,000. To receive this, you must save at least £12,000.
It is worth noting that you need to pay in at least £1,600 into the account to receive the minimum bonus of £400.
The Government bonus won’t be paid until you buy a home, where it will be claimed by your solicitor. Therefore, the bonus will not accrue interest.
What formats exist?
Lifetime ISA
Cash and Stocks & Shares formats are available.
Help to Buy ISA
Only available in cash format.
Is there a price limit on the house I buy?
A Lifetime ISA allows you to purchase a house up to the value of £450,000 regardless of the location.
Help to Buy ISA
Those using a Help to Buy ISA to save for a deposit will find that the maximum house price outside of London is £250,000, and £450,000 inside it. These relate to the overall value of the property, so if you are part of a shared ownership, the house must cost less than the limit.
According to the Office for National Statistics (ONS), the average house price at the time of writing is £220,713. This means that those using a Help to Buy ISA may struggle to find a suitable home under the limit.
Are there any other differences?
As you will have gathered by now, there are plenty of quirks that make the two ISAs very different indeed. For example, even the time it can be used differs among the two.
Lifetime ISA
The Lifetime ISA must have been open for at least 12 months before it can be used to purchase a home.
The money in your Lifetime ISA can be accessed at any time, however, to avoid a penalty, it must be used for a first home, or for your retirement (after the age of 60).
Help to Buy ISA
There is no minimum time that the account needs to be open for, but a minimum of £1,600 must have been saved. This can be achieved within three months, providing you pay a lump sum of £1,200 in initially.
The Help to Buy ISA can be accessed at any time, but you won’t get the bonus as it is applied at the time of house purchase.
Can I open both?
Technically, yes. But, do you need to?
There are one or two groups of people that may wish to open both, but for the majority, focusing their saving efforts on one will be enough.
However, someone who wants to start saving early may wish to use a Help to Buy ISA at 16 then use a Lifetime ISA, which has a higher contribution limit, when they can afford to do so.
So, which one is right for you?
That depends on several things.
Factors such as your age may mean you are not eligible for one or the other, so there is no clear winner.
Overall, the Lifetime ISA offers a larger bonus, because the contribution levels are higher. It also offers better growth or interest on the bonus, a higher house price limit and more flexibility when it comes to paying in, but suffers from a lack of providers offering a product.
Whilst the Lifetime ISA wasn’t introduced as a direct replacement, from the 30th of November 2019, you won’t be able to open a new Help to Buy ISA. Those with an open account will be able to save into it until 2029, and must buy a house by the 1st of December 2030 in order to claim the bonus.
It is not known how long the Lifetime ISA will be available for, but the nature of being a first home and retirement product suggests that it won’t be going anywhere anytime soon.
Mortgage advice for first-time buyers
If you are saving for your first home, you will need two things; a deposit and a mortgage.
We can help you choose the best way of saving for a deposit, and advise you on the right mortgage option from the thousands available. It’s also possible that our skilled and knowledgeable advisers may be able to find you a mortgage which means you can get on to the housing ladder sooner than you thought.
We are here to help; our advisers can be contacted on 0800 612 8099 or complete our online contact form by clicking here.