Update Note August 2016: While reviewing this blog I’ve noticed that in bashing it out, I used the term house deposit as shorthand – but that is ambiguous. So to clarify I am talking about the deposit you need to get a mortgage for a house, not the deposit you must give a seller at exchange.
This is explained in detail in my full polished Help to Buy ISA guide, and as explained in the blog please do read that for the full info on Help to Buy ISAs, this is just explaining a specific point.
For the last year Help to Buy ISAs have been king of the savings castle – for first-time buyers at least. Nowt else can compete with an extra 25% being added when it’s used towards a house deposit.
However, in the recent Budget it was trumped by the new Lifetime ISA, that’ll launch in April 2017, which also adds 25% for first-time buyers and lets you save far more.
Ever since then my email-bag has been jammed with people wanting to know which is best. Sadly the Harry Hill solution of “FIGHT!!!” doesn’t work. So instead I thought I’d bash out a bit of a compare and contrast analysis, to show who should get what, where, when and how.
If you’re unfamiliar with these two ISAs, please do first read my Top Help to Buy ISAs and Lifetime ISAs guides, which take you through the practical mechanics of how they work and rules on who is eligible.
I’m focusing on both of these only in the context of first-time buyers using them to save for a home deposit (the Lifetime ISA can be used for retirement savings, for that see how the Lifetime ISA compares with a pension).
So let’s start with a table setting out the basics…
|How much can you save?||£4,000/yr||£2,400/yr (£3,400 in year one)|
|Can you put lump sums in?||Yes||No, you need to save monthly|
|What’s the max bonus?||£32,000 (assumes max contribution over 32 years)||£3,000|
|When’s the bonus paid?||Annually (thus you get interest on the bonus once it’s paid)||When you buy a home (so no interest on the bonus)|
|Can you invest as well as save?||Yes, with cash & shares Lifetime ISAs||No. Cash only|
|What’s the max property price?||£450,000||£250,000 (£450k in London)|
|When can you use it to buy a home?||After the ISA has been open 12mths||Once you’ve £1,600+ saved (which can be done in three months)|
|Who can open it?||Anyone aged 18 to 39||Any first-time buyer aged 16+|
|Can I withdraw money if not buying a house?||Yes for retirement, but if earlier you won’t get bonus and may pay a penalty (still being consulted on)||Yes at any time, you just don’t get bonus|
As you can see the slight differences between the two does lead to some quirks…
Rule No. 1 – Even if the Lifetime ISA is for you, open a Help to Buy ISA now anyway. The Lifetime ISA is the winner for many people because you can contribute more to it. However, even with that in mind, open a Help to Buy ISA now, as once the Lifetime ISA is available you can transfer the Help to Buy ISA into it. And as long as you do it within the first year you won’t use up that year’s Lifetime ISA allowance.
Rule No. 2 – If you’re planning to buy before April 2018, open a Help to Buy ISA not a Lifetime ISA. Lifetime ISAs won’t exist until April 2017, and even then the plan is you will have to have had it open a year before you can withdraw and get the bonus. So those planning to buy sooner should stick with a Top Help to Buy ISA.
However, if it gets to March 2018 (the end of the first year of Lifetime ISAs) and you still haven’t used the Help to Buy ISA to buy a home, then it’s worth moving it across to the Lifetime ISA (barring the caveats below).
Rule No. 3 – If you’re buying quickly, go for a Help to Buy ISA not Lifetime ISA. Even once Lifetime ISAs start, you have to have had the account for a year before you can use it towards a home. With the Help to Buy ISA you only need to have £1,600 in it to use it and get a bonus, so that’s just three months of maximum contributions (£1,200 month one, then £200 each month after).
Rule No. 4 – The Lifetime ISA allows you to buy a property of up to £450,000 anywhere in the UK. So, open a Help to Buy ISA now and transfer it across to the Lifetime ISA. You can buy a property up to £450,000 with the Lifetime ISA but only up to £250,000 with the Help to Buy ISA (except in London where it’s £450,000).
However, if you open a Help to Buy ISA now, and then transfer it into a Lifetime ISA in 2017, it’ll then obey the Lifetime ISA rules so you’ll be able to buy a property worth up to £450,000 with it (though again you won’t be able to actually use it before April 2018 because of the ‘you must have had it for a year before using it’ rule).
Rule No. 5 – Aged 16 to 18 – open a Help to Buy ISA now. You can open a Help to Buy ISA at age 16. You can’t open a Lifetime ISA until 18. So, for parents wanting to put money away for their children to buy a home in future, the Help to Buy ISA is the right vehicle and it can be transferred into a Lifetime ISA later.
The only slight difficulty is for those who won’t be 18 by 5 April 2018. That’s because you’re only allowed to transfer the Help to Buy ISA into a Lifetime ISA without it impacting your 2017/2018 £4,000 allowance in its first year (and the last date of that year is 5 April 2018).
So, if you did save for a couple of years for a 16-year-old, because they couldn’t get a Lifetime ISA, then they would effectively be losing some of their first year’s Lifetime ISA allowance. This isn’t the biggest deal in the world because you still have the savings and still have the bonus on top of it. Yet, it does somewhat reduce the way you can manipulate this.
Rule No. 6 – Aged 39+ – go for a Help to Buy ISA. You have to be aged under 40 to open a Lifetime ISA, and as the first time you can get one will be 6 April 2017, that means if you were born on or before 6 April 1977 then you won’t be able to get one. But the Help to Buy ISA doesn’t have an age limit.
I hope that covers all the issues, if not let me know via the discussion links below.
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