The Government have released many schemes over the past 10 years which have the ultimate aim of helping First Time Buyers (FTB’s) onto the property ladder.  These range from shared ownership schemes to receiving interest free loans for the first 5 years to help with a deposit.  The biggest and most successful scheme, in my opinion, has been the Help To Buy ISA and its successor the Lifetime ISA, with 1.2 million being opened as of August 2018.[1]

However, the biggest question people are finding is which one shall I take out as I cannot use both to purchase my first home?

Ultimately, for me, it comes down to one question, “Do you think you will purchase a property within the next year?”  If the answer is yes, then Help To Buy ISA is the right way to go, if not then the Lifetime ISA should work out better.

This is also the case if you currently have a Help To Buy ISA and are debating transferring this into a Lifetime ISA. 

If you are not sure then I will strongly advise that you open a Lifetime ISA today – even with £1 – in order to get that year clock started.  I have previously outlined how long it can take to not only source, but complete on a mortgage!

Help To Buy ISA

The Help To Buy ISA was launched on 1^st December 2015 with the aim to provide First-Time Buyers the opportunity to save up to £200 a month with the government topping up their contributions by 25%, up to a maximum of £3,000.  The Conservative government introduced the policy in order to help with the growing issue which was labelled “Generation Rent”.  This policy has proved very popular with the latest figures saying that just below £170,000 properties have completed using the scheme.[2]

Naturally the biggest benefit of this scheme is that it encouraged FTB’s to start saving towards purchasing their first home, however, the scheme is not without its negatives. 

Firstly, the maximum house price in order to be able to use the scheme is £250,000 (£450,000 in London boroughs).  Typically, this should be high enough – especially with Lenders income multiples, which I speak about in an early blog – however, if you are purchasing in the suburbs of London, or in and around cities such as Manchester, Liverpool or Leeds, then it would be unlikely the property would meet this criterion.

Secondly, you are unable to use the bonus as part of your exchange deposit as the bonus is paid on completion.  Therefore, as the Telegraph reported, experts rendered this scheme technically useless.[3]

Due to these negatives the Help To Buy ISA has since been replaced by the Lifetime ISA, so you will be unable to open one after the 30^th November 2019[4] and can only save until 30^th November 2029 when accounts will close to additional contributions.  The Bonuses can be claimed until the 1^st December 2030.

Lifetime ISA

Introduced in George Osbourne’s Budget speech in 2017, the Lifetime ISA was bought in to replace the Help To Buy ISA.  The basic aim was to improve on the negatives of the Help To Buy ISA, for example the £450,000 maximum price was expanded to the entire of the UK. 

Secondly, the bonus from the Government was greater, with savers being able to contribute up to £4,000 every tax year and the government remained giving 25% of the contribution. 

Thirdly, as pointed out above the bonus could only be used towards the completion deposit and not the exchange deposit.  The Government introduced this in order to prevent savers from taking the bonus and then pulling out of purchasing the house.  Instead, with the Lifetime ISA the bonus is paid annually but the Government introduced the penalty – I talk about below – in order to counteract the issue with people using the product in a manner in which it was not designed.

Fourthly, the Lifetime ISA is available to anyone aged 18-39, not necessarily FTB’s.  Although, the idea is that savers would use the scheme to purchase their first home it also had the secondary purpose to help people save for their retirement.  This led to many smart home owners, taking out a Lifetime ISA and using it as a secondary pension as gaining a guaranteed 25% return is unbeatable in the market.

Fifthly, with the Help To Buy ISA, savers could only save monthly and could not save lump sum amounts.  This is not the case with the Lifetime ISA as savers can deposit as much or as little as they would like up to the limit of £4,000.

Sixthly, the Help To Buy ISA was only available as a cash saving – the top price being Barclays at 2.58% AER Variable.  The Lifetime ISA is available as both a cash saving and has the ability to be invested within the Stock Market.  This has enabled savers to have the potential to gain, using historical data, returns above inflation.  As a lot of savers would be circa 5-10 years away from purchasing their first home, this means they can not only achieve a 25% guaranteed return but the potential to gain good capital growth as well.

The Lifetime ISA is not without its negatives, the biggest being the penalties for taking your money out without purchasing your first home or before you are aged 60.  You are also able to withdraw the money without penalty if you are terminally ill and have a life expectancy of less than 12 months.  The Penalty is a 25% charge including the government bonus, which causes an effective 6.25% loss – assuming no capital growth.  I will explain this numerically.

Saver’s Investment: £4,000

Government Bonus: £1,000

Total Invested: £5,000

Therefore, a 25% charge would be £1,250.  Hence, the saver would return £3,750 from the £4,000 they invested.

Another downside to the Lifetime ISA is the simply fact they have to open a year before being able to use them.  This has left many savers frustrated as they have been saving into their Lifetime ISA and now being unable to use them.  Therefore, my advice is to open a Lifetime ISA as soon as possible in order to start that 1 year clock.

If you are worried about locking in your money and would prefer the access to it, should you require it, then open the account with only £1.

Unsure about which one would be correct for you, then see the straight forward table below – taken from Money Saving Expert[5]:

	Lifetime ISA	Help to Buy ISA
How much can you save?	£4,000 per year	£2,400 per year (£3,400 in year 1)
Can you put in lump sums?	Yes	No, you need to save monthly
What is the maximum bonus?	£32,000 (assuming maximum contributions over 32 years)	£3,000
When is the bonus paid?	Annually	On completion of purchasing a home
Can you invest as well as save?	Yes, with Cash and Stocks & Shares Lifetime ISA’s	No – Cash Only
What is the maximum Property Price?	£450,000	£250,000 (£450,000 in London Boroughs)
When can you use the ISA to buy a home?	After the ISA has been opened for 1 year	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

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
If you are still unsure about which ISA would be the correct one for you, then do not hesitate to speak to one of our Mortgage Advisers on 01923 852 080.  Alternatively, send us a message using our Live Chat!

Past Performance is not a reliable indicator of future performance and should not be relied upon