Never owned a home? Open a Help to Buy ISA, even with just £1! This special ISA gives first-time buyers up to £3,000 free towards their first mortgage but it closes to new applicants on November 30, so there’s now less than six months left.
Open one before then and you bag the facility in case you ever need it.
Actually two ISAs give first-time buyers free cash. The other is the Lifetime ISA (LISA), intended to be the replacement product for the Help to Buy (H2B ISA).
Yet you can only get the home-buying bonus on one, and which one wins for you is complex.
With both, as well as interest, a 25 per cent bonus is added to your savings i.e. a £250 boost per £1,000.
A first-time buyer is someone who has never owned, or part-owned, anywhere worldwide. You can qualify for one even if you’re buying with someone who’s owned before. If you’re both first timers, you can have one each.
Here’s how the two ISAs compare:
H2B ISAs are available to more people. You just need to be aged 16+. To open a LISA you need to be 18-39, so those 40+ should open a H2B ISA while they can.
LISAs can also be used for retirement savings (though they’re less attractive for this) but then you need to wait until you’re 60 to access the money penalty-free.
LISAs’ bonuses can be thousands of pounds bigger. You can save far more, up to £4,000 each tax year (as a lump sum or monthly) until the age of 50.
With H2B ISAs you can save a maximum of £1,200 in the first month and up to £200 a month afterwards, getting the bonus on up to £12,000.
This can make a big difference. For example open a H2B ISA today and max it out for two years and you’d have £5,800 in it, meaning a £1,450 bonus.
With a LISA you could put £4,000 in today and £4,000 in on both April 6 2020 and 2021 (the new tax year), that’s £12,000 saved – a bonus of £3,000.
LISAs let you buy a bigger property. Both can be used with any mortgage on any residential property, up to a set value. For H2B ISAs the limit is £250,000 (£450,000 in London), for LISAs it’s £450,000 everywhere.
H2B ISA bonuses can be triggered faster. To get the H2B ISA bonus you need £1,600+ saved – doable in just three months. Yet LISAs only pay the bonus if they’ve been opened a year or more (consider opening a LISA with £1 now, to start the clock).
LISA bonuses can be used for buyer’s as well as mortgage deposit. The LISA bonus is added each month – meaning it can be used to give the seller the 10 per cent deposit most request at the point of contract exchange.
The H2B ISAs bonus only comes after that, when contracts complete, so it only helps as a deposit to reduce your mortgage borrowing.
H2B ISAs let you withdraw penalty-free. That means even if you’re not sure you’ll buy a house, they’re a no-brainer.
Yet with LISAs you pay a 25 per cent penalty to withdraw cash, unless it’s for a home, or you’re 60+. As you’ve already had the 25 per cent bonus, it works out you lose 6.25 per cent (£62.50 for each £1,000 saved). So only save in a LISA if you’ll definitely buy a qualifying house.
H2B ISAs have better interest rates. The top payer is barclays.co.uk at 2.58 per cent. The top LISA is newcastle.co.uk at 1.1 per cent AER. If a LISA wins for you, its bigger bonus usually more than makes up for the lower interest.
So, in summary, if you’re 18-39, will definitely buy a home costing under £450,000, can max out the savings and won’t buy within a year, go for a LISA, as you will get a bigger bonus. Full help & options at
mse.me/LISA.
If you’re older, need to buy quickly, aren’t saving that much, or aren’t 100 per cent sure you’ll buy at all, it’s safer to stick with a H2B ISA. Full help at mse.me/H2BISA.
If you are not sure what to do, open both with £1. This gets a foot in the H2B ISA door before the November 30 deadline as, once open, it keeps working as normal for 10 years (though as you can put up to £1,200 in in the first month, if you’ll have that before November, wait until that point to open it).
While LISAs have no end date, they do have the ‘must be open a year’ rule, so opening one gets the clock ticking. I do have long-term concerns about LISAs’ viability, as they’ve not been successful.
The Government should keep the H2B ISA going. I’m going to ask but I doubt it will though.
