Laura Suter, personal finance analyst at investment platform AJ Bell, comments:
“As the tax-year end is looming, many will be rushing to fill their ISAs or open a new ISA account, but first-time buyers will be weighing up whether to open a Lifetime ISA or a Help to Buy ISA. The right one for you depends on a number of factors, including where you’re buying, how long you have until you buy your first home, and how much money you want to put away each year.
“From 30 November this year no-one can open a new Help to Buy ISA account, although if you already have one you can keep the account open and carry on paying into it for another decade, and you have until 1 December 2030 to claim your Government bonus.
“Those with their money still sitting in a Help to Buy ISA should consider moving it to a Lifetime ISA, which offers a larger potential bonus, the ability to put more money away each year and allows you to buy a more expensive property outside of London. However, it’s not for everyone as rates for cash accounts are lower and you can’t use it if you want to buy a property in the next year, for example.”
See our guide to whether the Help to Buy ISA or Lifetime ISA is right for you:
You can save a larger amount in the Lifetime ISA – You can save up to £4,000 a year into the Lifetime ISA, compared to the Help to Buy ISA where you can save up to £200 a month, plus an extra £1,200 in the first month of opening the account.
With the Lifetime ISA you can get more free money – Both the Help to Buy ISA and Lifetime ISA get the same 25% Government bonus, but with the Help to Buy ISA this is limited to the first £12,000 saved – meaning a maximum bonus of £3,000. With the Lifetime ISA you can get up to £1,000 a year in Government bonus, up until the age of 50. If you opened a Lifetime ISA at age 18, that is a maximum Government bonus of £32,000 (or £33,000 if you’re lucky enough to have your 18th birthday before 6th April).
Need to buy in 12 months? Use a Help to Buy ISA – You must have the Lifetime ISA open for 12 months before you can use the money to buy your first home. This means if you plan to buy in the next year, you should use a Help to Buy ISA, which doesn’t have this restriction.
You can invest a lump sum in a Lifetime ISA, but only save monthly into a Help to Buy ISA – With the Help to Buy ISA you are limited to saving £200 a month. If you miss a month, you cannot pay double in the next month. With the Lifetime ISA you can contribute up to £4,000 a year, in one or more lump sums or as a regular monthly saving.
Help to Buy ISA cash rates are higher – If you want to keep your money in cash the interest rate you can get on Help to Buy ISAs is better than Lifetime ISAs. There are three cash Lifetime ISA providers, Newcastle Building Society, which pays 1.1% interest, Skipton Building Society, which pays 1% a year, and Nottingham Buildong Society, which pays 1% but you can only open it in branch. According to Moneyfacts, the best Help to Buy ISA cash rate is currently 2.58% from Barclays. However, the higher annual limit, and so higher Government bonus, wipes some of this advantage out.
Cash Lifetime ISA: At 1% interest, on the maximum £4,000 saved, you’d end up with £5,050 with the Government bonus on the Lifetime Isa after one year – a £1,050 increase.
At 2.56% interest on the maximum £2,400 saved with a Help to Buy ISA, you’d end up with £3,077.40 after one year – an increase of £677.40.
You can have an investment Lifetime ISA – You can only hold your Help to Buy ISA in cash, while you can invest your Lifetime ISA in funds, shares, investment trusts and ready-made portfolios. This means if you are saving your money for longer you have the potential to generate greater returns by investing.
If you live outside London you can buy a more expensive property with the Lifetime ISA – With the Help to Buy ISA you can use it on a property worth up to £450,000 in London, but only on property worth up to £250,000 outside London. This has proved a problem for some in expensive areas outside of London, such as Cambridge and Brighton. With the Lifetime ISA there is a limit of £450,000 regardless of what area of the UK you’re buying in.
You can use the Lifetime ISA bonus for a house deposit, where the Help to Buy ISA bonus is only available after exchange – The Help to Buy ISA Government bonus is only issued after you have exchanged on a property, so cannot be used for the initial deposit, which has to be handed over at exchange. With a Lifetime ISA the Government bonus is paid monthly, meaning it can be used towards your deposit at exchange.
You can only use the Lifetime ISA if you’re between 18 and 40 years old – if you are over the age of 40, and have not yet opened a Lifetime ISA, you have missed the boat. This means your only option is to use a Help to Buy ISA to buy your first property.
If you change your mind, you’ll pay an exit fee on the Lifetime ISA – With the Help to Buy ISA, if you change your mind or want to make a withdrawal, for something other than buying your first home, you can redeem your money. As the Government bonus will not have been paid into the account, you don’t need to return any money. With the Lifetime ISA, if you want to withdraw money for anything other than buying a first home, retirement, or if you have a terminal illness, you will pay an exit fee. This is intended to claw back the 25% Government bonus, but it actually results in you losing the Government bonus and paying a 6.25% fee on top.
For example, if you invest £4,000, you’ll get the 25% government top-up and have £5,000 in total. If you choose to withdraw the money not for a first home or retirement, you’ll be charged 25%, which equates to £1,250. This means you have £3,750 left, £250 less than your initial investment.
