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Financial focus: Which ISA is better? ‘Help to Buy’ or ‘Lifetime’?

Financial focus: Which ISA is better? ‘Help to Buy’ or ‘Lifetime’?

George Osborne launched the 'Help to Buy' ISA back in late-2015 as a way of helping struggling first-time buyers get that precious first foot onto the property ladder. They are still available today, but for a limited time only. Customers will not be able to open a new 'Help to Buy' ISA after the 30th November 2019.

The 'Lifetime' ISA then came along a few years later, in 2017, this time offering perks to those same struggling first-time buyers, plus the long-term minded financial 'planners' out there who don't need to access their ISA monies until age 60.

So, for now, people must choose whether it is the 'Help to Buy' or the 'Lifetime' ISA that is the best one for them. But how do you decide which is best? Here are some of the key factors to consider before you decide:

 
 

Help to Buy ISA

Benefits

  1. The interest rate is higher for a Help to Buy ISA vs a Cash Lifetime ISA. The interest rate on a Barclays Help to Buy ISA is currently 2.58% AER vs 1.4% with a Moneybox (mobile app only) Lifetime ISA or 1.1% with a Newcastle Building Society Lifetime ISA.
  2. You must be age 16+ to open an account which means you can start saving earlier than a Lifetime ISA, which is age 18.
  3. If you do not use the Help to Buy ISA for the property purchase, you can withdraw the money without a penalty.
  4. If you do use the monies saved for a property purchase, you can claim a tax-boost of up to £3,000 which are added onto your savings to help give you a larger deposit.

Drawbacks

  1. The maximum you can put into a Help to Buy ISA is an initial payment of £1,000 followed by a maximum of £200 pm (£1,200 in the first month).
  2. The property purchase price cannot be above £250,000 if you live outside of London (£450,000 in a London borough).
  3. It helps with the mortgage deposit NOT the exchange deposit (i.e. the bonus is paid on completion rather than on exchange).
  4. The bonus is paid on completion when you buy the property, not monthly.
  5. The maximum bonus is £3,000 which will take around 4 years, 8 months to achieve.
 
 

Lifetime ISA

Benefits

  1. You can contribute up to £4,000 per year, which is higher than the Help to Buy ISA.
  2. The property purchase price can be up to £450,000 anywhere in the UK, not just in London.
  3. The bonus is paid monthly, therefore helping you to see your savings increase. You will also receive interest on the bonus monies.
  4. The total bonus you can receive is £33,000.
  5. You can use the Lifetime ISA for either the exchange deposit or the mortgage deposit.
  6. You can invest the money to try and achieve higher growth rates than that paid on cash interest. (It is important to seek advice if you are looking to do this as investing the monies means the value of your savings can go down as well as up).

Drawbacks

  1. The Lifetime ISA cash interest rate is a lot lower than a Help to Buy ISA (1.4% with Moneybox (mobile app only) or 1.1% with Newcastle Building Society).
  2. There is a penalty if money is withdrawn and not used either for a property purchase, or after age 60.
  3. You must be age 18+ in order to have a Lifetime ISA, so you potentially miss 2 years of contributions. (However, you can open a Help to Buy ISA at age 16 and transfer it to a Lifetime ISA at age 18.)
  4. The Lifetime ISA must be open for a minimum of one year before buying a property.

There are pros and cons to each product, so it really is a personal decision. Some prefer the 'Help to Buy' ISA because there are no penalties if you withdraw money. However, the bonus is bigger for the 'Lifetime' ISA and the value of the property that can be purchased is higher, so this may be a better option for some people. Again, there is a deadline for those looking to open a 'Help to Buy' ISA; the 30th November 2019, so if you think you might be interested, do not hang around.

In summary, if you are certain that you are using the money to buy a property and do not mind waiting a year to purchase your property, you should seriously consider the 'Lifetime' ISA.

 
 

More info

The Residential Property Department at Pinney Talfourd Solicitors are also here to help those proceeding with a property purchase and can help take away the pressure and share the burdens involved in processing a residential property transaction.

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