How to use my Help to Buy ISA or Lifetime ISA

So you’re looking for a new home and already find the whole process confusing before you’ve even hopped onto a property portal like Rightmove or Zoopla. You come across terms like “Help to Buy’ and ‘Lifetime ISAs’, which sound great, but you don’t really know what they do.

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Don’t worry, because you’re not the only one. Everyone seems to be talking about help-to-buy schemes, but loads of first-time buyers (and even some who have moved a fair few times) don’t know exactly how Help-to-Buy or a Lifetime ISA works. 

That’s what we’re here for: to help you understand everything you need to know about ISAs and how they can help you get the keys to your next home.

What is a Help to Buy ISA? 

The Help to Buy scheme was recently created by the government, making it easier for first-time buyers to purchase their first home by adding to their savings. That sounds great, but of course, there are a few rules to keep in mind. 

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You are able to receive a bonus 25% of your savings from the government, but it is capped to a maximum of £3,000. The home you purchase can only be worth up to £250,000 (or up to £450,000 in London), and you also can’t use your Help to Buy savings for anything other than buying your home.

If you do find yourself really needing those savings for a reason other than purchasing your first home, you won’t be charged for withdrawing your funds but you will not receive your bonus from the government. 

The Help to Buy ISA scheme closed on 30 November 2019, so new applicants will unfortunately not be able to benefit from it. For people who did open their ISA before this date, however, you are able to deposit your savings into your ISA until 1st December 2030, at which point you must have purchased a home and claimed your deposit. 

What is a Lifetime ISA (LISA)? 

The LISA has been around a bit longer than the Help to Buy ISA, and there is currently no cut-off date for applying for it. That’s because it’s not only for first time home-buyers but also those saving up for retirement. 

Anyone between the ages of 18 and 40 can open a Lifetime ISA, and they will also receive a 25% bonus from the government, but it is maxed at £1,000 per year, which allows you to save up to £4,000 per year.

The eligible house price you can use your Lifetime ISA for is also a bit higher, capped at £450,000 for a home anywhere in England. With a LISA, you will be penalised with a 25% government charge (20% until 5 April 2021) if you are under 60 years old and you withdraw your funds for any reason other than purchasing your first home.

Which one is better? 

There is no straightforward answer to this question, because everyone will have a different financial situation to consider. You can have a Help to Buy and a Lifetime ISA, but of course, you’ll only be able to claim your bonus from one of the accounts when purchasing your home. People often go down this route and use their Help to Buy savings for another purchase down the line, since this ISA does not incur any penalty charges for early withdrawal. 

The Help to Buy ISA is a great choice if you are looking to purchase your first home quite soon, or in the next few years. Since the government will only give you a bonus of up to £3,000, no matter how much you have saved, you’re looking at a maximum of £12,000 in your ISA. At a maximum rate of £200 consistently saved into your Help to Buy ISA each month, you’ll reach that maximum savings amount in five years.

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There is an option to deposit £1,200 into your account in the first month, which would in turn shorten that five-year period even more. However, it’s important to consider where you might be looking to buy a house in those next 5 years or so, as your bonus will only apply to houses priced £250,000 and under. 

Generally speaking, the southern part of England experiences higher house prices than the north so your first home may easily tip over that £250,000 mark in the next few years. If you are potentially interested in buying, or uncertain you will ever buy a house, the Help to Buy could just be another savings account you can withdraw from without getting charged. 

The Lifetime ISA could be a better option for people who are either able to save more each month or are willing to wait longer to maximise that additional yearly bonus, since you’re able to deposit up to £4,000 per year, or about £330 per month, until you turn 50 years old.

Again, if you are looking to purchase a home in an area where prices are well above the Help to Buy bonus limit of £250,000, the Lifetime ISA might be your only choice since you can claim your bonus if your house costs £450,000 or less.

The Lifetime ISA is also a friendlier option for people who are unable to ensure they’ll save every month, whether that’s due to the nature of their income or if they don’t want to be tied down to monthly payments for whatever reason.

This is because you are able to deposit lump sums into your Lifetime ISA whereas the Help to Buy ISA only allows for monthly deposits. If you want to maximise your savings you can really only do that by depositing into your Help to Buy ISA consistently, every month. 

If you are purchasing your first home with another person, make sure they also apply for a Help to Buy ISA, a Lifetime ISA, or both! Their individual savings account will receive the same bonus.

For example, a couple looking to buy a house together, both with Lifetime ISAs, each saving £2,500 per year for 5 years, will save a total of £25,000 plus the government’s additional bonus of £6,250 on top of that. This would allow them to put down a 10% deposit on a house costing just over £300,000.

How do I use my Help to Buy ISA or Lifetime ISA? 

When you’re looking to purchase a house and are about to exchange contracts with the seller, you would notify your provider so that they can request your government bonus from your Help to Buy ISA. This bonus is available on completion of the house.

If you want to use your Lifetime ISA to buy a home, a very similar process applies. You should contact your provider so the money can be sent to your solicitor. There is technically no bonus to claim as it has been paid into your account on a monthly basis, so all of your funds are available when exchanging contracts with the seller. 

If you want to use your Lifetime ISA for retirement, you are able to take out a portion of your funds, or all of them, without incurring any fees after your turn 60 or are diagnosed with a terminal illness. You won’t have to pay any tax on the money in your Lifetime ISA and you are free to use it for whatever you need. 

If you want free, no obligation mortgage advice, you can contact our team of mortgage advisers for support.

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