The Help to Buy ISA is due to be scrapped on the 30th November 2019, meaning time is running out for first-time buyers wishing to take advantage of a product that offers tax-efficient savings as well as generous top-ups from the government.
A lot of the rhetoric will have first-time buyers believe that a Help to Buy ISA is essential to their future house-buying plans, but is it actually worth opening, considering that a Lifetime ISA, a worthy alternative, is already available? We look at both below.
What is the Help to Buy ISA?
The Help to Buy ISA is a cash ISA launched by the government in December 2015 to help first-time buyers get onto the property ladder by topping up their monthly contributions by 25%. Below is a summary of the main features of the Help to Buy ISA but you can find more information in these articles:
Features of the Help to Buy ISA
- Cash ISA
- Maximum £200 contribution per month (except the first month where you can deposit up to £1,200)
- 25% bonus from the government (maximum of £3,000 in total) Added to your account upon completion
- Can withdraw your money at any time to use how you wish (however you will not qualify for the government bonus)
- For anyone aged 16+
- Both people in a couple can have a Help to Buy ISA
- Maximum property value £250,000 (£450,000 in London)
There is no denying that it is an attractive proposition for any potential first-time buyer, especially the 25% top-up in what is essentially free money from the government. But with all the focus on the Help to Buy ISA and the deadline looming I feel people may be rushing into making a decision when there is actually, in my opinion, a better product available - the Lifetime ISA (LISA).
What is the Lifetime ISA and how does it compare to a Help to Buy ISA?
The Lifetime ISA (LISA) was introduced in 2015 and will effectively replace the Help to Buy ISA once the 30th November deadline has passed. I personally feel that the Lifetime ISA is a better option for first-time buyers. Here's why:
- The LISA allows you to save up to £4,000 a year compared to £2,400 per year with a Help to Buy ISA
- It can be used to buy a property up to the value of £450,000
- The 25% government bonus is paid into your account monthly whereas it is only paid in upon completion of your property with a Help to Buy ISA. This has two main advantages. Firstly, you earn interest on the money that the government pays in and secondly, as the money is available prior to completion, it can be used towards legal fees.
- There's the opportunity to receive more than £3,000 in government top-ups
- Both people in a couple can have a Lifetime ISA
- A Lifetime ISA can be a stocks and shares ISA or a cash ISA
- If you decide not to buy a property, a Lifetime ISA continues for your lifetime (hence the name) and can be used as a pension, meaning you can gain access to the money (including the government bonus) from the age of 60.
Help to Buy ISA vs Lifetime ISA
As with everything, there are some negatives which are worth considering. The Lifetime ISA is slightly more restrictive than the Help to Buy ISA. It cannot be opened until the age of 18 compared to the age of 16 for a Help to Buy ISA. In this instance, I would encourage a 16-year-old to open a Help to Buy ISA with just £1, especially as it can be transferred into a Lifetime ISA at a later date.
It is easier to withdraw your money from a Help to Buy ISA and you can withdraw it almost immediately without any penalties. You are unable to access money from a LISA for a minimum of 12 months and if you withdraw money from a Lifetime ISA (other than to purchase a property or if you are diagnosed as terminally ill) you will be charged a fixed penalty of 25%. Once you turn 60, you can access the money, penalty-free.
If you decide to take out a Stocks and Shares Lifetime ISA, then this will come with an element of risk and additional fees and so you may receive less than you pay in.
The Help to Buy ISA only allows you to use the money to purchase a property, however, the Lifetime ISA has additional flexibility, allowing you to use the money towards retirement instead. Anyone can open a Lifetime ISA up to the age of 40 and can continue to pay into it until the age of 50.
Additionally, you are unable to open a cash ISA in the same financial year as a Help to Buy ISA, although some providers do allow you to split ISAs (so they are within the same wrapper), which means they manipulate the rules to allow you to pay into both in the same year. However, you can open both a stocks and shares Lifetime ISA and a cash ISA in the same financial year.
How to transfer money from a Help to Buy ISA to a Lifetime ISA
You can transfer money from a Help to Buy ISA into a Lifetime ISA, however this is limited to the Lifetime ISA allowance, which is currently £4,000 for the 2019/20 tax year. If you have already made contributions into your Lifetime ISA in that tax year, then you can only transfer what is left of your annual allowance. So long as you are under 40, you are free to transfer your Lifetime ISA between LISA providers and the good news is that doing so doesn't affect your annual payment limit. Remember though that as with other types of ISA, you can only make contributions into one Lifetime ISA in each tax year.
Help to Buy ISA vs Lifetime ISA comparison table
To easily demonstrate the differences between a Help to Buy ISA and a Lifetime ISA, I have put together the below table:
|Help to Buy ISA||Lifetime ISA|
|Monthly deposit||£200 (£1,200 in month 1)||No limit (Maximum £4,000 a year)|
|Maximum annual contribution||£2,400 (£3,600 in year 1)||£4,000|
|Minimum opening amount||£1||£1|
|Bonus paid||Upon property completion||Monthly|
|Best interest rate||2.58%||1.4% (cash LISA)|
|ISA type||Cash||Cash or stocks and shares|
|Maximum property purchase price||£250,000 (£450,000 London)||£450,000|
|Maximum government bonus||£3,000||£33,000*|
*Assuming you contribute the £4,000 every year from aged 18-50
Both the Help to Buy and Lifetime ISAs are great for first-time buyers and which one you open depends on your personal circumstances and preference. Personally, I opened a cash Lifetime ISA as I knew I wouldn't be buying a house for at least 12 months and liked the opportunity to contribute as much as £4,000 a year. Additionally, I live on the outskirts of London and property prices are relatively high so the Help to Buy ISA limit of £250,000 is particularly restrictive.
I opened my LISA with £1 and pay into it each payday with any spare cash I have. I like the flexibility and that I don't have to stick to only saving £200 per month. Having a LISA means that my partner and I could potentially have £20,000 to put towards a deposit within two years as opposed to £13,200 with a Help to Buy ISA (£7,200 in the first year and £6,000 in year two).
If you do decide to go for the Help to Buy ISA, you must make sure that you complete your property purchase by 1st December 2030 in order to benefit from the 25% government bonus (as no bonuses will be paid after this date). Whatever you decide, it is worth thoroughly researching your options and working out which ISA works best for you. If you are still unable to decide after extensive research, then why not open both? While only one government bonus can be used to purchase a property, there is nothing stopping you opening both for now while you work out which one works best for you, meaning you don't fall foul of the looming deadline.