Is the Help to Buy ISA or the Lifetime ISA best for first-time buyers?
We’re all too aware of the pressures now facing young people trying to take their first steps onto the property ladder – with house prices climbing every month and wages falling in real terms, scraping together a deposit can be nigh on impossible for wannabe first-time buyers.
In the past few years, the government has brought in several new measures to help tackle the housing crisis – including ways to give young people a leg up with their house deposits. In 2015, the government announced the Help to Buy ISA, and last year they added Lifetime ISAs to the products available.
Both options offer first-time buyers a way to save, tax-free, and be rewarded for their efforts with a bonus when it comes to completing on the purchase of a house. They aren’t completely equal, however, and it’s worth finding out a bit more about the pros and cons of each option before committing – because you can’t use both.
Help to Buy ISA
The Help to Buy ISA is only available to people who don’t already own property but there’s no upper age limit – and if you’re part of a couple intending to buy together, you can open one each. They’re readily available at high-street banks, and although interest rates have fallen since they were first introduced, they still tend to be better than other savings accounts on the market.
The premise of the Help to Buy ISA is that the government offers a 25% bonus on all money paid into the account, which is payable when the money is withdrawn to make a deposit on a house. It’s not a complete free for all and there are limits; you can only add £1,200 to the account in the first month and £200 in each month thereafter. The total bonus that the government will pay is also capped at £3,000 and you’d need £12,000 in the bank in order to earn that.
That said, an extra £6,000 towards a deposit for a couple of first-time buyers is nothing to be sniffed at. The accounts are currently available to open until December 2019, and the government will continue paying bonuses until 2030, so if it’s a product you’re interested in, there aren’t many tax years left to get in there and open one.
A relatively new product, the Lifetime ISA expands on the premise of the government offering a bonus of 25% to responsible savers. As well as the balance being available to withdraw for a first-time property purchase, account holders can also opt to wait until retirement and withdraw the funds in a lump sum after they turn 60.
The maximum bonus that the account will pay out is a whopping £32,000, and the maximum that can be deposited yearly is £4,000. In order to take full advantage of the account, savers would have to deposit £4,000 every year but two of their working life, which few will be able to do at 16 or 17!
The bonus is also added to the account yearly, rather than at the end, meaning account holders can benefit from compound interest on the bonus as well as on what they are paying in.
It’s a marginally better option financially for those wannabe homeowners able to save more, as the £4,000 year cap allows first-time buyers to build their bonus more quickly and buy earlier – but no Cash Lifetime ISAs are currently on the market, only riskier stocks and shares ISAs.
The bonus offered on both account types is far, far bigger than the interest on any normal savings account, so whether it’s saving for retirement or for your first property, it’s probably worth your while opening one or the other. When you’ve got a deposit together and you’re ready to apply for your first mortgage, come to Fox Davidson independent mortgage broker first to find out how we can help to get you the best deal. Or for any other advice on looking for your first mortgage in Bristol, Bath or London, contact us today.