A leg-up onto the property ladder with an Isa

Businessman climbing the property ladder © iStock
Climbing the property ladder – the state will now give you a helping hand on the climb

You can save for a new home with a help-to-buy Isa or a lifetime Isa. Which is best?

The lifetime individual savings account (Lisa) is due to launch in April and will offer first-time buyers up to £32,000 to put towards their home. But how does the new addition to the Isa family compare with the existing help-to-buy Isa? Both products offer tax-efficient savings and boost first-time buyers’ savings by 25%. However, that’s where the similarities end – Lisas and help-to-buy Isas differ in terms of eligibility, savings limits, the maximum government bonus on offer, and investment options. So, which one is best and can you have both?

The help-to-buy Isa

Isas have been around since 1999 and offer savers tax-free returns up to set contribution limits. The help-to-buy Isa was launched in December 2015 with the aim of helping potential first-time buyers save for a property deposit. Up to £12,000 can be invested via a combination of an initial deposit of up to £1,200 plus up to £200 per month. The government will then add up to 25% on top of this, which is paid when the house is bought. The property can’t cost more than £250,000, or £450,000 if it’s in London.

The maximum government bonus with a help-to-buy Isa is £3,000. To get this, savers need to stash away £12,000 in their account – the £200-a-month cap on deposits means this will take just over four and a half years. A couple jointly buying a property can hold one help-to-buy Isa each, and thus accumulate up to £6,000 in bonus money. There are several rules you have to stick to in order to get the cash from the government. Firstly, you need to save at least £1,600 before you receive any bonus at all.

Secondly, money saved in a help-to-buy Isa must be used to buy your first home (not a buy-to-let) and you need to buy it with a mortgage, not outright for cash. If you decide not to buy a home, you can withdraw the cash from your account – but you won’t receive any bonus. When you’re ready to buy your home, you’ll need to close your help-to-buy Isa and your solicitor or conveyancer will apply for your government bonus. There’s been some controversy about the stage in the home-buying process at which buyers receive this bonus.

When you buy a house you normally pay a 10% deposit when contracts are exchanged, and the rest of the money on completion (usually a couple of weeks later). But help-to-buy savers don’t receive their government bonus until completion, which means that it can’t be used for the exchange deposit. With this fact not clearly communicated from the outset, some of the first people who used a help-to-buy Isa to buy a home found they had a cash shortfall when contracts were exchanged.

Another downside of the help-to-buy Isa is that, because you only get the bonus when you close your account, there’s no opportunity to earn interest on the bonus money. One final point to remember is that help-to-buy Isas are cash products only – you can’t invest the money. The best buy account on offer is currently from the Tipton & Coseley building society, which pays 2.75% AER. However, holding an Isa with a particular provider doesn’t oblige you to apply for a mortgage with the same bank or building society – you’re free to shop around.

The lifetime Isa

Lisas launch in April and will be available to savers age between 18 and 39. They are designed for saving for either a first home or retirement. As with the help-to-buy Isa, the government adds a 25% bonus to savings pots, but the products have differing terms and conditions. For a start, you can save more in a Lisa – up to £4,000 a year compared with £2,400 for a help-to-buy Isa.

You also get the 25% bonus with the Lisa, which equates to a possible £1,000 a year. But this bonus is payable every year until you reach age 50, which means that the maximum possible bonus is £32,000 (assuming you open the Lisa at age 18). Of course, if you plan to use the Lisa to buy your first home, you are unlikely to hold on to it for that long before you use it to fund your deposit.

Another benefit with the Lisa is that the bonus is paid annually (so you can earn interest on it) whereas with the help-to-buy Isa it’s only paid at the end. Also, unlike help-to-buy Isas, which are cash only, Lisas give savers the option to invest in the stockmarket. Several investment companies have announced plans to launch stocks and shares Lisas from April. Also, you can buy a property worth up to £450,000 anywhere in the UK using money saved in a Lisa (a higher minimum – outside London at least – than for the help-to-buy Isa).

Martin Lewis, founder of the MoneySavingExpert website, reckons the free money means that opening an account is a “no brainer” for first-time buyers. “Building on the success of the help-to-buy Isa, it allows you to put more money in and get a bigger bonus, and you’ll be able to get that money at exchange as opposed to having to wait until completion. So not only will it help with the mortgage deposit, it’ll also help with the contract deposit,” he says.

Once you’ve opened a Lisa, you don’t have to stick with the same provider forever. As with normal Isas, interest rates will go up and down and you can transfer between different providers. And if you already own a property or don’t want to buy one, you can use a Lisa to save for your retirement and cash it in after the age of 60. However, whether you should or not is another matter – experts say a pension is usually the better option.

Which to go for?

Although experts generally agree the Lisa is the better product, many savers will already be paying into a help-to-buy Isa and will be wondering what to do come April when Lisas are launched. That’s particularly the case as the government is planning to phase the help-to-buy option out over time. They will no longer be available to new savers after 30 November 2019, and any bonuses must be claimed (ie, a house purchased) by 1 December 2030.

So what should you do? You can save into a help-to-buy Isa and a Lisa at the same time, subject to the annual limits – but you can only use the bonus from one to buy a property. Kevin Mountford of MoneySuperMarket suggests that anyone who plans to buy a home before April 2018 should stick with a help-to-buy Isa. “Anyone needing to buy sooner rather than later would probably want to consider keeping the help-to-buy option as you can secure a bonus upon saving £1,600, whereas with the lifetime version it’s not available yet and you need to own it for a year before any bonus is paid,” he explains. Also, there’s the age limit to consider.

If you were born on or before 6 April 1977 you’ll be too old to get a Lisa, so if you’re still saving for your first home, then a help-to-buy Isa will be the only way to get help from the government. Help-to-buy Isas can be opened from the age of 16 and don’t have an upper age restriction.

However, for most people, it will make more sense to transfer funds currently held in a help-to-buy Isa into a Lisa. Money deposited in a help-to-buy Isa before 6 April 2017 can be transferred to a Lisa in the 2017/18 tax year without impacting your allowance – so you can still save an extra £4,000. If you save into a help-to-buy Isa after 6 April 2017, you can still transfer it to a Lisa, but this will impact your allowance for that tax year.

The total Isa allowance – across the whole suite of Isa products – is £15,240 for the current tax year, and rises to £20,000 for the coming tax year. So, if you deposit £4,000 into a Lisa in 2017-18 you’ll have £16,000 of your allowance left to invest in other Isas in the same tax year. If you already have money in other Isa products, you can transfer up to £4,000 of this money into your Lisa each year. Saving into a help-to-buy Isa bars you from contributing to another cash Isa in the same tax year although you can still add to an equity or innovative-finance Isa.