Help to Buy ISA vs Lifetime ISA - which one might be best for you?
When you’re saving towards the deposit for your first home; every penny counts. This would explain the popularity of ISAs in general as they enable tax free savings, especially the Help to Buy ISA.
What is a Help to Buy ISA?
Launched in 2015, the scheme provides first time buyers with the option to save tax free with the additional benefit of a 25% top up from the Government towards their deposit, with a maximum bonus available of £3,000.
However, fewer people are aware that another scheme, called the Lifetime ISA (or LISA), was introduced last year, which provides greater flexibility than a Help to Buy ISA and, best of all, the potential of a bigger bonus.
How do you decide which ISA is best for you?
In some respects, a LISA is similar to a Help to Buy ISA, as you’re able to save tax free and you still receive a 25% top up from the Government. However, with a LISA the amount you can deposit each year is higher, as you can save up to £4,000 versus £2,400 a year in a Help to Buy ISA (apart from the first year when you can save £3,400).
With a LISA, you can save for up to 32 years or until you are 50 and, by saving the maximum amount, you would earn a whopping £32,000 bonus from the government, either to use against the deposit on your first home or towards your pension. That’s £29,000 more than the maximum bonus that can be received under the Help to Buy ISA scheme. Also, with a LISA, your bonus is paid annually, so you earn interest on that as well as the amount you’ve saved, but with a Help to Buy ISA you only receive your bonus when you buy a property.
LISAs are more flexible as you can make lump sum deposits as well as a regular monthly amount. With a Help to Buy ISA the maximum you can save per month is £200 and you can’t make lump sum deposits either.
How much do I need to save and what are the price limits?
Another difference is that a LISA allows you to buy a property of up to £450,000 anywhere in the UK, whereas the maximum property value you can purchase with a Help to Buy ISA is £250,000, apart from London where the upper value is £450,000.
Anyone between the ages of 18 to 39 can open a LISA, but a Help to Buy ISA can be opened at 16 for those who want to start saving earlier. However, if you opened a Help to Buy ISA at 16, there’s nothing stopping you transferring it into a LISA once you get to 18 in order to maximise your savings and the bonus you can earn.
It’s also worth remembering that you’ll need to hold a LISA for a year before you can use the savings and any bonus towards buying a property, whereas with a Help to Buy ISA you can use it after three months, so this may be a better option if you’re purchasing in the short term.
Another thing to bear in mind is that if you are co-buying with someone else who also has a Help to Buy ISA, you can only use both lots of savings and bonus if you both hold a Help to Buy ISA, providing the property you buy is within the guidelines in terms of upper value. However, if one of you has a LISA and one of you has a Help to Buy ISA, as the rules stand currently, you can only use the Government bonus from one of them to buy your first home.
When does the Help to Buy ISA end?
Help to Buy ISA’s are available to open until 30 November 2019, so there’s still time if you’ve not already started one and want to do so. If you’ve already got a Help to Buy ISA in place, then you can use it to save until 30 November 2029, and you must claim your bonus from the Government by 1 December 2030.