Laura Suter, personal finance analyst at investment platform AJ Bell, comments:
“Using the Government’s bonus schemes when saving to buy a house can shave years off the time it will take to save your deposit, and save you thousands of pounds. For example, if you’re saving £4,000 a year and just putting it into a normal savings account it will take you 12.5 years to get together a £50,000 house deposit. But if you use a Lifetime ISA and get an extra £1,000 Government bonus each year, you’ll get to £50,000 in 10 years – shaving more than two years off the time to save the deposit, and meaning you’ll need to save £10,000 less of your own money. For a couple both saving £4,000 a year it would take more than six years to save the £50,000 in a savings account, but using a Lifetime ISA would cut 15 months off the time it takes to save, and mean the couple would have to personally save £10,000 less.
“If you don’t already have one, you’ve missed the boat to open a Help to Buy ISA, with the scheme closing last year. But thousands of people will have already opened an account and will still be paying in – if you’re one of these, should you switch to the Lifetime ISA or stick with the Help to Buy account?
“There’s no clear answer and it depends what you’re using it for, when you want to buy your own home, how much money you have and how you like to save. The biggest thing to get right first is to make sure you’re getting the best return possible on whichever account you pick, and that you’re maximising the free Government money.”
Should you switch your Help to Buy ISA into a Lifetime ISA?
Big saver? Use a Lifetime ISA – If you’re able to save more than £2,400 a year then you could be better off with the Lifetime ISA. With the Help to Buy ISA you can save up to £200 a month, plus an extra £1,200 in the first month of opening the account, but with the Lifetime ISA you can save up to £4,000 a year – which works out as around £333 a month.
More savings means more free Government money – With both the Help to Buy ISA and Lifetime ISA you’ll get a 25% Government bonus on your money, but the maximum amount each year and across the lifetime of the accounts is higher with the Lifetime ISA. With the Help to Buy ISA the bonus 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.
Want to buy soon? Stick with the Help to Buy ISA – If you want to buy in the next 12 months then the Lifetime ISA isn’t for you, as you have to have the account 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, stick with your Help to Buy ISA as it doesn’t have this restriction.
Do you save monthly or more sporadically? –The Help to Buy ISA is great for regular savers who are able to put away money every month, up to the £200 a month limit. But if you miss a month, you lose out on that allowance – you can’t pay double in the next month. The Lifetime ISA is more flexible, for those people who might have fluctuating earnings or different expenses each month and so can’t save regularly. You can contribute up to £4,000 a year, in one or more lump sums or as a regular monthly saving.
If you stick to cash, Help to Buy ISAs pay more – 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, for now. There are five cash Lifetime ISA providers, and according to Moneyfacts the top rate is 1.4% from MoneyBox – the app-only bank. In comparison the best Help to Buy ISA cash rate is currently 2.58% from Barclays. However, now the Help to Buy ISA market is closed to new applicants, and some providers aren’t allowing people who have a Help to Buy ISA with another provider to switch into their product, there’s a worry that rates will fall in the market thanks to a lack of competition.
Want to invest? Get a 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.
Live in pricey areas outside London? The Lifetime ISA offers more – If you’re using the Help to Buy ISA you can buy a property worth up to £450,000 in London, but only property worth up to £250,000 outside London. This has proved a problem for some in expensive areas outside of London. With the Lifetime ISA there is a limit of £450,000 regardless of what area of the UK you’re buying in.
Want to use the bonus for your deposit? 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 it cannot be used for the initial deposit that’s handed over at exchange. With a Lifetime ISA the Government bonus is paid monthly, meaning it can be used towards your deposit at exchange.
Are you over 40? You can’t use the Lifetime ISA – if you’re 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 stick with the Help to Buy ISA to buy your first property. If you’ve opened neither (and you’re over 40) then sadly you’ve missed out on both schemes.
Not sure you’re in it for the long haul? Don’t use 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.
