On 22nd November 2017, many people hoping to get on the property ladder were rejoicing when The Budget 2017 abolished Stamp Duty for first-time home buyers in England and Wales purchasing homes up to £300,000. This means that first-time buyers could save up to a whopping £5,000 – HURRAY! With one less thing to worry about, the deposit becomes the main large expenditure when it comes to finding a property. But how does one save for a deposit?
Whilst many people are very self-disciplined when it comes to saving, others tend to opt for an ISA account in order to save for a deposit. In this post, we will compare and contrast the two ISA’s that people tend to choose; the Help to Buy ISA and the Lifetime ISA.
The Help to Buy ISA is a government scheme aimed to help people save for a mortgage deposit to buy a home. With the attractive proposition of a 25% bonus from the government on any contributions to use towards a first home, they are understandably very popular. However, the new Lifetime ISA, launched in April 2017, provides the same attractive government bonus (25%), but also offers other significant benefits compared with the Help to Buy ISA.
Help to Buy ISA
People saving into a Help to Buy ISA can put up to £1,200 in during the first month, then a maximum of £200 a month after that. You can save less if you wish, but it has to amount to a minimum of £1,600 to qualify for a bonus (in this case, it would be £400).
Anyone aged over 16 is able to open a Help to Buy Isa. Most importantly, you must be a first-time buyer. Therefore, you can’t have owned or part-owned a property in the past.
If for whatever reason you decide not to buy a home you can cash in the ISA at any point. You will not get the government bonus but will still receive the interest of up to 2.27% a year, depending on the bank/banking society.
In the past there has been some confusion around when you can actually access the bonus money. Importantly, you only get it on completion of a home purchase. You don’t get it at the “exchange” stage, where buyers typically put down a 5% or 10% deposit to guarantee the purchase.
If you decide to opt for a Lifetime ISA, you can save up to £4,000 a year with a government bonus of 25% of everything you save, up to £1,000 a year. The money can be used to buy a first property or be put towards retirement from the age of 60. Savers, therefore, have the potential to earn a total of £32,000 in bonuses if they pay in the maximum £128,000 over 32 years from age 18. Accounts can be held in cash, or stocks and shares.
You must open a Lifetime ISA before you turn 40,
However, there is a huge penalty if you decide to make an early withdrawal from your ISA account. If you take out any money before you reach 60 and do not use it to buy a first home, you pay a 25% penalty. For instance, imagine if you saved £4,000 in a Lifetime ISA over a year, receiving the £1,000 boost for a total of £5,000. If you cash this in you would have to pay 25% of this total (£1,250). The penalty applies unless you are terminally ill or if you die.
NB. The government has cut the LISA exit charge to 20% from 25%. The reduction will be backdated to 6 March 2020 & will remain until 5 April 2021. This means LISA holders will only have to pay back the government bonus they have received & not the additional withdrawal charge of 5%.
By all means, you can have both a Help-to-Buy ISA and a Lifetime ISA, but you can only use the government bonus from one account to buy your first home.
Now if this whole article is a little bit too wordy for you, below is a well crafted tables outlining the key features of the Help to Buy and Lifetime ISA.
|LIFETIME ISA (FOR HOME PURCHASE)||HELP TO BUY ISA|
|Max contribution?||£4,000 a year||£2,400 a year (£3,400 in year one)|
|Lump sums?||Yes||No, must save monthly|
|Max bonus?||£32,000 (assumes max contribution every year from 18-49)||£3,000 (assumes max contribution over four years and eight months)|
|When’s the bonus paid?||Bonus payments are calculated on a month-to-month basis.||On completion when you buy a home|
|Investment option too?||Yes, through stocks & shares||No. Cash savings only|
|Max property price?||£450,000||£250,000 (£450,000 in London)|
|How quickly can you use it?||After the LISA’s been open 12 months||Once you’ve saved £1,600+|
|Who can open it?||Anyone aged 18 to 39||Any first-time buyer aged 16+|
|What can it be used for?||Your deposit and the mortgageable part of the property||Just the mortgageable part of the property|
|Can I withdraw money if not buying a home?||Yes, at age 60+; if earlier you don’t get the bonus and will pay a penalty||Yes, at any time, you just don’t get the bonus|
Blog written by Shamila Sulaiman.
*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.