If you’re a first-time buyer, then you may have investigated, or even invested in, one of the government-backed bonus ISA accounts. Yet, many don’t entirely understand how they work or how to get the most from their investment due to the many rules associated with them.
While the Help to Buy ISA closed to new applicants in November 2020, many took advantage of its offer and can use any savings built up until 2030. But only to buy your first property.
In contrast, the Lifetime ISA (also known as LISA) is still available to applicants aged 18-39 years old and can be used either to buy a home or accessed without restriction after the account holder reaches 60 years old. With this ISA, you can save cash or invest in the stock market – which while riskier, could also potentially provide better returns. If you withdraw the money to buy your first home, you can continue saving to it towards your retirement, so in effect, it can benefit both.
In addition to the government bonus, you can earn interest on the savings and won’t pay tax on them, which makes them an attractive savings scheme. However, as there are limits on the amount you can save to these ISAs each year, they are unlikely to provide enough for a decent deposit in the short-term, even with the bonuses, and you will most likely need additional savings to top-up any shortfall.
Another consideration when taking out a government bonus ISA is that you will be liable to penalties if you withdraw any cash from them before you are 60 if it is for any purpose other than to buy a home. This will potentially negate any benefits you’ve accrued from the bonus and/or interest, so it is highly advisable to avoid doing so if possible.
Let’s look at the differences between the two ISAs:
Help to Buy
You must be a first-time buyer. You can save a maximum of £200 each month, or £2,400 each year The bonus is 25% or £50 each month, but capped at a maximum of £3,000 (if you save £12,000) To get the bonus, your solicitor has to apply for it when you exchange on a property and it will be paid before completion. Therefore, it can only be used as a mortgage deposit, not an exchange one. The maximum price of a property you can buy using this scheme is £250,000 outside of London, or £450,000 in London. You can earn between 1-1.75% in interest on your savings. If you are buying with someone else, you can combine your bonuses, but only if the other person is also a first-time buyer. If not, you can still buy with them and use your bonus. If you need to withdraw the money, you won’t get the bonus, but you can keep the interest and there are no withdrawal penalties. You have to save at least £1,600 to qualify for the bonus. You will have to live in the house and not rent it out and must be using a mortgage to buy it.Lifetime ISA
You must be a first-time buyer, aged between 18 and 39 years old to open an account. Most building societies offer cash LISAs and investment platforms offer stocks and shares LISAs. The Moneybox app offers both options and is currently offering the best interest rates for cash LISAs. You can save up to £4,000 each year. The bonus is 25% which can be worth up to £1,000 each year. You can open the account from 18 years old and save every year until you are 50. The bonus is automatically added to your savings after the first month The maximum price of a property you can buy using this scheme is £450,000 with no regional restrictions. The current best interest rate available is 0.6% for cash savings, however, investing in a stocks and shares option may offer better returns, but your savings are more at risk. If you are buying with someone else, you can combine your bonuses, but only if the other person is also a first-time buyer. If not, you can still buy with them and use your bonus. If you withdraw the money for any reason other than to buy your first home before you are 60, then you will forfeit the bonus and also incur a 25% penalty. Once you are 60, there are no restrictions on withdrawing the money or how you use it. Your account must have been open for at least 12 months before you use it to buy a home. You will have to live in the house and not rent it out and must be using a mortgage to buy it.
