For those saving for a first-time residential property, Help to Buy ISAs and Lifetime ISAs are no-brainers, as an unbeatable 25% bonus is added as well as interest. In other words you get an extra £250 per £1,000 saved towards any mortgage.
Yet as you can only get the home-buying bonus on one of them, you need to pick which is right for you (LISAs can also be used for later life saving, so you can have both).
Around 1.1m people have Help to Buy ISAs (H2B) which were launched first, yet it’s likely fewer than 100,000 have LISAs, even though they’re far better for some. And there’s a big deadline a week away if you want to shift your H2B into a LISA. First though, decide which is best for you…
Help to Buy ISA v LISA? One way to decide, FIGHTTT.
If everything else was equal, LISAs would be an easy winner, as you save far more in them, so get a far bigger bonus.
- Help to Buy ISAs: up to £200/mth (£1,200 month 1): With H2B the limits are monthly, meaning the max saving is £3,400 in your first year, and £2,400 each year after that.
So, a new Help to Buy ISA saver starting today and putting in the max by mid April 2019 would have £3,800 in, a bonus of £950.
- LISAs: up to £4,000 per tax year (as lump sum or reg saving). That means with a LISA you could put £4,000 in today, £4,000 in on 6 April 2018 (the start of the new tax year) and £4,000 in on 6 April 2019 (the next tax year), so that’s £12,000 saved, meaning a bonus of £3,000.
So in this example, you’d get more than three times the bonus maxing out a LISA compared with the H2B; therefore if it’s suitable, it’s the winner. Yet there are lots of other things to consider, so I’ve drafted up this table to compare the two…
The differences between a Lifetime ISA and Help to Buy ISA
|LIFETIME ISA||HELP TO BUY ISA|
|Opening age||Anyone aged 18 to 39||Anyone aged 16+|
|Max contribution?||£4,000 per tax year||£200 per month (£1,200 in first month)|
|Max property purchase value||£450,000||£250,000 (£450,000 in London)|
|Is there a penalty if I take cash out without buying a home?||Yes (1) (unless you leave it until age 60+)||No, you just don’t get the bonus|
|How long before I can use it?||A year after the LISA was opened||Once you’ve £1,600+ saved (so as quick as 3mths)|
|When can you use the bonus||Exchange and/or completion (2)||Completion only (2)|
|(1) The penalty is 25%. Yet this is on top of the 25% bonus. The net effect is for every £1,000 put in you get £937.50 back, a loss of just over 6%.
(2) As the Help to Buy ISA bonus is only paid at completion, it can’t be used towards the exchange deposit, just towards reducing the mortgage borrowing. The LISA bonus usually comes in time to be used for exchange.
Hopefully the table gets you there. If not, in summary…
– If you’ll DEFINITELY buy a home, for less than the LISA maximum of £450,000, are aged 18 to 39, and you won’t do it within a year, go for a LISA as you will get a bigger bonus.
– If you are older, NEED TO BUY QUICKLY or you’re not 100% sure you’ll buy at all then it’s safer to stick with (or get) a Help to Buy ISA.
Still confused? Watch my Help to Buy ISA v LISA show. Some find it easier to watch and listen rather than read. If so, I did a full show on this topic on 29 Jan, you can still watch it on the ITV Hub for another week.
Want to change your Help to Buy ISA into a LISA? – HURRY
If you’ve got a H2B ISA, have read above, and realised a LISA is better for you as you’ll get a bigger bonus… don’t worry. You can transfer the money into a LISA. However, a big rule change is due, which is all about whether the transferred cash uses up your £4,000/tax year LISA allowance.
- Transfers this tax year, ie by 5 April 18 (in practice 1 March): All contributions you’ve already made to your Help to Buy ISA this tax year, will eat up this year’s LISA allowance. However a special rule says any money you put into your H2B ISA before this tax year doesn’t – and it’s this exemption that’s soon ending.
So if you had £5,000 in your Help to Buy ISA, £3,000 from the last tax year, £2,000 from this – then only £2,000 counts towards this year’s LISA allowance, leaving you a further £2,000 to contribute to fill it up. However, while the official deadline is 5 April, the only cash LISA provider Skipton BS (there are shares LISAs), says you must start a transfer by 1 March for it to process in time, so you need act quickly.
- Transfers after 6 April. If you leave it until the next tax year, all money moved eats up your £4,000 annual LISA allowance. That therefore risks reducing what you can put in next year, and at worst, for those with over £4,000 in your H2B ISA, means you can’t transfer it all so will miss out on some bonus.
In terms of how you do the transfer, its simple. Just open up the new LISA and as part of the forms you can ask to transfer your H2B across.
What are the best deals?
These are covered in full in our Help to Buy ISA and LISA guides. Obviously the critical one right now is the top (and only) cash LISA deal which is from Skipton Building Society and pays just 0.75% interest.
You may be put off by the fact that this is lower interest than you get in your Help to Buy ISA right now. Yet if a LISA is right for you, that’s dwarfed by the fact you can contribute so much more.
– Why are there so few LISA providers? It’s likely many banks are worried that if they offer LISAs and people inappropriately use them for retirement instead of pensions, they’ll have a mis-selling case against them. So they prefer to stay out of the market.
This really does need sorting out especially as Help to Buy ISAs will no longer be available to new openers from December 2019.
Got questions on Help to Buy ISAs and LISAs?
Whenever I write or broadcast about this, I’m often swamped with the same questions such as “can my partner and I have one each?” (yes), “can I get one if my partner isn’t a first-time buyer?” (yes), “what counts as a first-timer?” (never having owned in any way a property before) and more.
And do let me know below what you decided to do.