On 6 April 2017 the new Lifetime ISA launches, allowing first-time buyers aged under 40 to save up to £4,000 a year, with the state adding 25% on top towards a deposit for a home.
Yet there’s already a very similar product called the Help to Buy ISA many first-time buyers already have. So the big question is, should you transfer your Help to Buy ISA into a Lifetime ISA?
I’ve filmed a quick video to help, though do read the full Lifetime ISA guide which has real detail, before making your final decision…
PS: After filming I realised one little extra point it’s worth bearing in mind. If you’re not using it to buy a house, money in a Help to Buy ISA can be withdrawn with no penalty (though you don’t get a bonus). With Lifetime ISAs, if you’re not using it to buy a house (or for retirement) then you still get the bonus (and interest) but pay a 25% withdrawal penalty, which is a net hit of 6%. So if there’s a chance that may happen Help to Buy is less risky.
You can find more details on both products in the Top Lifetime ISAs guide and Top Help to Buy ISAs guide.
Below in case you didn’t catch anything is a transcript of the video.
I’m Martin Lewis from MoneySavingExpert.com and in the next couple of minutes I’m going to try and blitz you through the answer.
First of all we have to size up the competitors: Help to Buy ISA versus Lifetime ISA.
The big advantage of the Lifetime ISA? You can put up to £4,000 a year in it. You get 25% as a bonus on top if you are a first-time buyer using it towards a mortgage. So that means a maximum annual bonus of £1,000 here.
The Help to Buy ISA works the same way, but you can only put £1,200 in the first month and then £200 a month in after that; that means in year one the maximum bonus is £850 and it’s £600 a year maximum bonus after that.
In other words, the Lifetime ISA gives you £1,000, which is better, as it has bigger limits.
Next, age. Well, you have to be aged between 18 and 40 to open a Lifetime ISA, but as long as you’re 16 and above you can open the Help to Buy ISA. So if you’ve got a Help to Buy ISA you need to check whether you’re eligible for the Lifetime ISA before you try to transfer it across. If you’re too young, so 16 or 17, or too old – 40 or above – you can’t get the Lifetime ISA so it’s more limited than the Help to Buy ISA.
Next, choice. Help to Buy ISAs – only cash savings. Lifetime ISAs – cash and stocks and shares. So if you wanted to up the risk you can do it in a Lifetime ISA, though if you are a first-time buyer and you’re going to use it for that rather than its other function, for retirement savings, you probably want to keep it more in savings because you’ll be using the money quite soon.
Next, another Lifetime ISA winner coming here. With the Help to Buy ISA the property has to be less than £250,000, apart from in London when it’s £450,000. You can use the Lifetime ISA on any property, anywhere, up to £450,000, so that’s another winner.
The next difference between the Help to Buy ISA and the Lifetime ISA is that the bonus for the Help to Buy ISA can only be used at completion of your property, effectively towards your mortgage deposit. The bonus on the Lifetime ISA can be used at exchange, so you can use it on the deposit that the person you’re buying the house off wants; they normally want 10% at exchange, which is a little bit more flexible than the Help to Buy ISA.
But for most people what really counts is, can I use it? And therefore the big difference between the two of these is speed. With the Help to Buy ISA, as long as you’ve got £1,600 in there, you can then use it towards your mortgage deposit and you will get the bonus and you can do that as quickly as three months.
With a Lifetime ISA you have to have it open for a year before you can get the bonus added toward your first-time property. Now this is really important for people thinking of transferring the Help to Buy ISA over to the Lifetime ISA, because if you move your Help to Buy ISA money you’re then going to be locked in there for a year before you can buy your home, limiting your flexibility. Don’t worry though, I have a solution for this!
Right, so this is the best strategy for most people – on the 6th April 2017, or a day or two after, put a pound in your Lifetime ISA. It’s now active and that clock is ticking for that year countdown, even though you’ve only got a pound in there and if you end up not using it, it doesn’t matter – you can withdraw the pound and hey it’s only a pound anyway.
Meanwhile, keep putting money in the Help to Buy ISA. Then if you need to use your Help to Buy ISA because there is a house you want to buy, you can use it and you can do it straightaway. If you don’t want to buy in the first year, towards the end of that first tax year – I am probably talking around March 2018 – you can transfer your Help to Buy ISA money into your Lifetime ISA.
Now remember you’re only allowed to put £4,000 a year in the Lifetime ISA, so here’s how it works with the transfer.
Any money you had contributed to the Help to Buy ISA before the Lifetime ISA started, ie, before the 6th April 2017, doesn’t count towards your £4,000. Any money you put in after the 6th April 2017 does count towards that £4,000, so when you transfer the Help to Buy ISA across you will have had some money that was from before that doesn’t count. Any money you put in after 6 April 2017 will eat up your £4,000 limit, but you’re able to top it up so long as you do it before the end of the first tax year (5 April 2018), no problems at all. So then you get the best of both worlds.
Now it is worth noting, if you don’t transfer your Help to Buy ISA across in the first year of the Lifetime ISA, you can’t transfer it at all. So you really need to move the money across in the first year.
But this way you get the best of both worlds: you still have your Help to Buy ISA to use whenever you want in the first year of the Lifetime ISA, but you don’t give up your Lifetime ISA allocation and you get the Lifetime ISA clock ticking straightaway, so that as soon as you move the money across and we tick past the 6th April 2018, all the money in your Lifetime ISA would get the bonus towards your first-time property.
I do hope that makes sense; I know it’s a little bit complicated but hey, they make the rules, I’m just explaining them! Good luck to you.