Is it worth me paying into my Help to Buy if I’ll always have more money in my LISA?
14 April 2021
Question by James
Hi, I have a Lifetime ISA with Hargreaves Lansdown and a Help to Buy ISA with my bank, and I pay the max contributions into both. I don't plan to buy a house for about 5 years, is it worth me carrying on paying into my Help to Buy or should I be doing something else with this cash? It gets around 0.95% interest rate. I know I can take the Help to Buy out at any time, so should I use that for a business later in life and/or use the LISA for a house? Is it worth me paying into my Help to Buy if I’ll always have more money in my LISA? Should I invest it instead? Appreciate any help. Cheers, James
Answered by Ernesta Clayton
To help you with your question I will outline some key differences between Help to Buy and Lifetime ISAs.
If you have both a Help to Buy ISA and a Lifetime ISA, then you can continue to save into both accounts. Be aware that you will only be able to claim one bonus towards the purchase of your first home.
Both are designed to help you buy your first home and give you a 25% bonus on your savings subject to certain limits.
The main difference is that you can save £4,000 a year in a Lifetime ISA, compared with £2,400 (£3,400 in year one) in a Help to Buy ISA. This could mean a much bigger and quicker bonus when compared to a Help to Buy ISA.
With Help to Buy ISA you won’t earn interest on your government bonus as it is claimed through the conveyancer before completion, but after exchange of contracts. Lifetime ISA has bonus paid monthly so you earn interest on the bonus as well as your savings. Also, the funds are available on the exchange of contract on the purchase.
However, you have to have the Lifetime ISA for at least a year to be able to use it to buy a home, whereas Help to Buy ISA just has to have a minimum of £1,600 for you to be able to use it for a home purchase and claim the bonus.
Another difference between the two is that Help to Buy ISA can be only used for property purchases worth up to £250,000 or up to £450,000 in London, whereas Lifetime ISA can be used for a purchase of a home worth up to £450,000 anywhere in the country.
You are right in saying that you can withdraw the money out of Help to Buy ISA anytime and there are no penalties of doing so, but once withdrawn it will lose its tax free status and eligibility to receive a governments bonus.
You can transfer your savings from your Help to Buy ISA into your Lifetime ISA but bear in mind that the transfer will count towards the annual limit for your Lifetime ISA (currently £4,000 2021/22). You will not receive the Help to Buy bonus, but the funds transferred will qualify for the Lifetime ISA bonus. However, unlike Help to Buy ISA which are always cash account and carry no fees, the Lifetime ISA can also be stocks and shares and carry fees which differ from provider to provider.
As you cannot use the bonus from both the Help to Buy and Lifetime ISAs for the purchase of your first home and you had to choose one, considering that you pay maximum contributions into both, then a Lifetime ISA is a better option when using for the purchase of your first home.
That being said, you could carry on contributing to and utilise the Help to Buy ISA for the purchase of your new home and use the Lifetime ISA for your retirement. You can carry on contributing and getting the bonus to Lifetime ISA till age 50. Once you reach 60, you will be able to make full or partial withdrawals tax free.
If you draw the money out before the age of 60 for anything other than buying your first property you will have to pay a government penalty of 25% which could mean you receiving less back than you put in.
You have not mentioned whether your HL Lifetime ISA is invested, or a cash one. However, if you are looking to put money aside for a longer term (minimum of 5 years) you could consider investing in stocks and shares ISA as your savings could potentially grow quicker than comparing to investing in cash ISA. Please remember, when investing your money in stocks and shares ISA, you need to take into account the fees and that your capital may be at risk and you may get less thank you put in.
By necessity, this briefing can only provide a short overview and it is essential to seek professional financial advice before applying the contents of this article. This briefing does not constitute advice or a recommendation.
Mortgage and Protection Adviser
I started my career in Financial Services and Banking back in 2016 and ever since I have assisted hundreds of people on their journey to home ownership. I hold a Certificate in Mortgage Advice and Practice (CeMAP) and this is my area of expertise. I am also an associate member of the Chartered Institute of Securities and Investments (CISI) and have recently completed my Level 4 Diploma in Investment Advice.