Lifetime Isa versus help to buy
29 Sep, 2021
For cash-strapped first time buyers, every penny counts. A bigger deposit can not only help you get a bigger house, but a cheaper mortgage rate too. The way you save for a deposit can make a difference, probably not the difference between Chelsea and Walthamstow, but definitely a percent or two.
The government offers two main tax-incentivised schemes for homebuyers – the Lifetime Isa and the Help to Buy Isa. These two products have elements in common. They are both designed to help first time buyers save to buy a house with a mortgage. The savings grow tax free and can earn a 25% bonus, paid for by the government. Both have restrictions on how much can be saved and put caps on the price of the property.
Savers with enough money can have both, but – confusingly – they can only use one of the accounts as a deposit for a first home purchase. That means at some point, they have to decide which is a better option to build up a deposit.
If’s worth saying that this isn’t a problem for those starting out today. Help to Buy Isas aren’t available any more. They were phased out in 2019 as the government decided it preferred the newer, shinier Lifetime Isa. However, as Kay Ingram, chartered financial planner, points out, “if you already have a Help to Buy Isa, you can continue to save in it until November 2029 and will get a 25% bonus on your savings, providing you complete your home purchase by December 2030.”
The key differences
Stock market versus cash – This is the biggest difference between the two Isas. Help to buy is a cash-only product. While rates are higher than a standard savings account, you’re probably only getting 1% if you’re lucky, which doesn’t beat inflation. At a time of rising house prices, it’s like trying to catch a gently rising balloon.
You can also invest Lifetime Isa money in cash, but a stock market investment can provide more protection against inflation and/or rising house prices. Annoyingly, this is probably only an option if you’ve got five or more years to invest, but if you pick the right investment it can make a real difference to the size of your deposit.
How much can be invested? - Investors can put up to £4,000 into a Lifetime ISA every year. Those that put in the maximum every year will receive an extra £1000 from the government and the government is happy to keep topping up up those contributions until the age of 50. However, there are no limits on the growth. If you pick a good investment, the sky’s the limit.
Help to Buy Isas allow £200 per month, up to a maximum contribution of £12,000. Here too, there are no limits on the growth, but given that it is in cash and rates are pretty anaemic, you’re not going to shoot the lights out.
Age limits – Lifetime Isas can only be opened by anyone aged between 18 and 39. You could open a Help to Buy Isa at 16 (but not any more – see above). There is no upper limit subject to the maximum contribution levels.
How you use it – The proceeds from a Lifetime Isa must be used for a first home, up to the value of £450,000 (note: the money will be paid directly to the conveyancer/solicitor, so there’s really no getting round this). However, they can also be used for retirement at age 60 and over. Help to Buy Isas can only be used for a house purchase, but the limits are stricter. It can only be invested in a first home worth up to £250,000, or £450,000 in London.
An objective view
Armed with this information, which is the right option? Kay Ingram says that for most people saving for a first home the LISA offers a better deal than Help to Buy ISA, but she says there are a number of exceptions. “If you’re over 40 and have not opened a LISA, you’ve left it too late. LISAs have to be opened before age 40, but there is no upper age limit on a Help to Buy ISA providing you have already opened one.
“Equally if you are near to 50, the 25% bonus won’t be added to your LISA savings after age 50 but can continue under the Help to Buy ISA.”
She says the Help to Buy ISA can also be better for those who aren’t sure they want to buy a home. It gives you access to your savings without any conditions or penalties, but won’t earn any bonus added unless used to buy a first home, but she adds, “if you cash in a LISA other than for house purchase, before age 60, 25% of the amount withdrawn is paid back to the Government, which means losing the 25% bonus and some of your own savings too. After age 60 you can access LISA savings tax free and penalty free, on a flexible basis, so they can be used to top up retirement income.”
Help to buy can also be a better option if you want to buy quickly. The LISA has a 12 month waiting period from opening it before you can use it, while the Help to Buy ISA can be accessed once you have £1,600 saved.
She says: “Apart from these exceptions, if sure that house purchase is a definite goal , or you are willing to wait till 60 to access your savings, the LISA offers a better deal.”