Help to Buy ISA vs Lifetime ISA –
which is right for me?

While Cash ISAs have long been used by potential first-time buyers to build a deposit, there are two government savings initiatives which are available that aim to help people achieve their dreams of home ownership.

The Help to Buy ISA was launched in December 2015. It was joined in the market by the Lifetime ISA in April 2017. Both ISAs are designed to give wannabe buyers a boost in saving a deposit. Although there are several key differences between the two products.

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How much can I save?

The maximum Lifetime ISA contribution in the 2018/19 tax year is £4,000 (subject to contributions into other types of ISAs). This is the more generous allowance of the two schemes. You’ll receive a 25% bonus from the government on top of what you deposit. Meaning you’ll earn up to £1,000 if you were to max out your allowance.

With a Lifetime ISA you can deposit £4,000 in a lump sum or make multiple payments across the year. The government bonus will be paid into your account on a monthly basis, meaning your savings will be boosted sooner than with a Help to Buy.

You can open a Lifetime ISA if you are aged between 18 and 39. And you can pay into the account until you reach the age of 50, meaning you could earn up to £32,000 in government bonus payments. For example if you already own a home, or choose not to use the funds towards a first home deposit, you can access your Lifetime ISA once you turn 60 to help fund the costs of retirement.

The Help to Buy ISA is more limited with stricter rules around how much you can pay in. Savers can contribute up to £1,200 when they first open the account. Deposits thereafter can be made on a monthly basis, with a limit of up to £200, no additional lump sums are permitted.

Savers can contribute a maximum of £12,000 in a Help to Buy ISA. This would generate a government bonus of up to £3,000. However, this bonus will be paid when the house purchase is completed, meaning it cannot be used for a deposit.

With a Lifetime ISA your money can be used for both the mortgage and deposit.

Who can open an account?

UK residents aged 16 or over can open a Help to Buy ISA. However, you’re not allowed to open an account if you own, or have previously owned, a property.

The Lifetime ISA is only available to people aged between 18 and 39 and you’re also not allowed to have owned a property before, if you wish to use the bonus to buy a home.

However, the Help to Buy ISA is due to close to new customers on 30 November 2019. After that date only existing customers will be able to pay into their accounts. Existing Help to Buy ISA customers can transfer their funds, up to £4,000, into a Lifetime ISA at any time. Please note, you will only be able to use either the Lifetime ISA OR Help to Buy ISA to purchase your first home, the government bonus won't be granted on both.

What else can it be used for?

The Help to Buy ISA must be used to purchase a home. On the other hand, a Lifetime ISA can be used to save towards your retirement or buying your first home.

While most people who are employed full-time are likely to benefit more from using a traditional pension, the self-employed and those who already max out their yearly pension allowances can use the Lifetime ISA as another way to save towards retirement.

If you decide to pay into a Lifetime ISA instead of a workplace pension you could miss out on valuable employer contributions. Money in a Lifetime ISA could affect your entitlement to means tested benefits. If you're not sure a Lifetime ISA is right for you, please contact an independent financial adviser.

What other restrictions are there?

Would-be first-time buyers should also make a note of the other restrictions on the scheme. As the schemes are meant to be used by typical first-time buyers, there are limits to how much your property can be worth.

The Help to Buy ISA limits property purchases to £250,000 or less, although this rises to £450,000 if the property is in London. The Lifetime ISA limit is set at £450,000, regardless of location.

If you choose to withdraw cash from the Help to Buy ISA you’ll face no penalty. However, with Lifetime ISA withdrawals, any money you withdraw before you're 60, that is not for the purchase of your first home, will be subject to a 25% government withdrawal charge on total amount withdrawn. This could mean you get back less than you paid in. You can also use your Help to Buy ISA at any time, whereas the Lifetime ISA must be open for a year before it can be used.

Alternatively, if you choose to buy a home outside of the scheme you can still keep the cash in the Lifetime ISA until you retire.

You can also use your Help to Buy ISA at any time, whereas the Lifetime ISA must be open for a year before it can be used, if you're planning on using it for the purchase of your first home.

Help to Buy vs Lifetime ISA Summary:

Which account is better will depend on your personal circumstances. If you’re looking to buy in the next year then the Help to Buy ISA could be the best pick. This is because a Lifetime ISA can’t be used within the first 12 months of opening the account, if you're planning to use it for the purchase of your first home.

If you prefer to invest in stocks and shares rather than save in cash, the Lifetime ISA could potentially be the right option for you as both cash and stocks and shares accounts are available. Depending on the provider. Stocks and shares can generate a higher return than cash saving. But remember the value of your investment can also fall due to market fluctuations.

For many people a consideration will be how much bonus you can earn. The Lifetime ISA gives account holders the opportunity to a bigger bonus each year, and for more years, than the Help to Buy ISA.

Interested in finding out more?

If you're interested in finding out more about our Lifetime ISA, including charges and eligibility, click on the button below to find out more about our OneFamily Lifetime ISA.

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