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Two of the best ways to save for your first home

With official government figures showing that the average UK house price has more than doubled in the past 20 years, even the prospect of saving for a deposit has become daunting for many.

A young couple sit on the floor of their apartment, cardboard boxes in the background, smiling at something on the woman's iPad.

What’s more, the National Office of Statistics indicated earlier this year that wages in England and Wales haven’t grown nearly as quickly as house prices. It means you need around 7.6 times the average salary to buy a house these days, up from 3.6 times back in 1997.

Thankfully, help is at hand. New forms of government assistance are becoming increasingly easy to access, no matter how much you earn. And that could mean collecting a free bonus of up to £32,000 to help spring you onto the property ladder.

The two main forms of assistance for first-time home buyers come via a Help to Buy ISA and a Lifetime ISA. Both have their advantages and disadvantages, depending on how much money you need, and how quickly you want to spend it.

What is a Help to Buy ISA?

Introduced by the government at the end of 2015, Help to Buy ISAs offer a 25% bonus on your savings. So for every £100 you put into your account, the government gives you an extra £25. This is available to all UK residents over the age of 16 with a valid National Insurance number. But it can only be used by first time buyers.

Unfortunately, the government contributions can’t exceed £3,000 in total. But that’s still a decent chunk of change, considering it’s free.

Nearly 1 million Brits have opened Help to Buy ISAs. These have already contributed to more than 62,000 property purchases, according to data released last month by the Department for Communities and Local Government.

The minimum you’ll need to tip into your account to start receiving a bonus is £1,600. You are allowed to save up to £1,200 in your first month, then £200 for every month after that, giving you access to your first bonus as soon as three months after opening your account.

The pros and cons of opening a Help to Buy ISA

A big advantage of Help to Buy ISA is that you won’t be penalized for spending your money on things other than a home. You’ll just miss out on the 25% bonus for the amount of money you’ve withdrawn.

Interest rates on Help to Buy ISAs can be similar or even higher than for ordinary cash ISA’s. This means opening one isn’t a bad bet, even if you’re thinking of withdrawing funds for non-home buying purposes.

Help to Buy ISAs may stop being offered in November, 2019, though that doesn’t necessarily mean you’ll need to rush. From that time on, Lifetime ISAs will take over. You will be able to have both a Help to Buy ISA and a Lifetime ISA. However only one of them will be able to be used towards the purchase of a buyer’s first home.

What is a Lifetime ISA?

As mentioned above, this is the new kid on the deposit-savings block, having only become available from April 2017.

Lifetime ISAs offer savers the same annual 25% government-supplied bonus, but the size of the bonus is much higher than for a Help to Buy ISA. With a Lifetime ISA, you can tip in up to £4,000 each year, earning you an extra £1,000 of free money annually.

Lifetime ISAs are restricted to people aged between 18 and 39 and bonus contributions stop at age 50. That means it’s conceivable that someone could achieve a bonus of £32,000, should they be able to contribute the maximum £4,000 a year from age 18 to 50.

What can I use a Lifetime ISA for?

The catch is that the money can only be used for two things. Either a house deposit, or as a retirement income after you turn 60. Dare to withdraw your money for anything else and you’ll get hit with a penalty worth 25% of your most recent savings balance. This would leave you with less than you invested.

Another problem, at least for now, is that only four companies are currently offering Lifetime ISAs. Just one provider is offering a cash Lifetime ISA, which, at the moment, has a very low interest rate. The other three are all investment Lifetime ISAs, where you put your money into shares.

The benefit of a shares-based product is you can enjoy share-price gains, on top of the 25% bonus. Of course, stock markets also go down, so as with any investment, there is a risk of losing money. In addition, it’s worth being aware that each of the three providers charges investment management fees.

Those who want to make a property purchase soon should also be warned. The first 25% cash bonus isn’t available until 12 months after the ISA is opened. So fast movers may want to opt for a Help to Buy ISA instead, while they still can.

Written by Ross Kelly

Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.