The Lifetime ISA was launched in April 2017, creating a second government backed saving scheme for first time homebuyers alongside the already established Help to Buy ISA. We discuss their respective merits in the following article.
The Help to Buy ISA is available to any UK resident who is aged 16 or above. In order to qualify for the bonus scheme, you must be a first-time buyer, so you can’t have owned or even part-owned a property in the past – whether in the UK or abroad.
The ISA allows you to put in an initial deposit of up to £1,200. You are then able to add £200 per month thereafter. With this scheme, it’s important that you save regularly. If you fail to save the maximum of £200 one month, you can’t then make up the difference the next.
The government offers a 25% bonus on the full amount you save, up to £3,000. To get this maximum bonus, you would need to accrue £12,000 in savings – based on the current investment allowance, this would take around four years.
Note that this ISA is scheduled to close to new savers on 30th November 2019 – unless the government chooses to extend it.
If you decide to buy a home, your bonus will be paid out to you only on completion of the property purchase, rather than the exchange stage when you would normally put down the deposit.
If you end up not buying a home, you won’t receive the government bonus but you will still get a very good value 2.27% interest a year.
The Help to Buy ISA is a form of cash ISA, so your investment is protected and you get interest based on a variable or fixed rate. As such, there is very little risk associated with the saving scheme.
If you want to open a Lifetime ISA (often referred to as a LISA), age restrictions are a little tighter. You must be between the ages of 18 and 39, although you can continue to save until the age of 50.
You are able to save up to £4,000 per tax year with the Lifetime ISA and will receive a government bonus of 25%, which equates to a maximum of £1,000 per year. The bonus is paid annual and is added to your total savings, meaning that you’re able to earn interest on it.
This generous scheme offers you the potential to earn £32,000 towards your first home, based on the maximum potential saving of £128,000 over 32 years. However, should you decide against buying a home and withdraw the money before you’re 60, there is a 25% penalty to pay. This applies except in the case of terminal illness or death.
Lifetime ISAs can be held in cash or in stock and shares. If you go for the latter, you could stand to make more money; however, it also presents a greater potential risk.
If you’re looking to buy a home, and are eligible, then a Lifetime ISA is probably right for you thanks to its potential to allow you to earn greater bonuses at a faster rate. On the other hand, if you fall outside the age restrictions, or have already owned a property, then a Help to Buy ISA isn’t a bad option – at least while it still remains open to new savers.
It’s worth noting that there’s nothing stopping you having both, although you’ll only be able to use the bonus from one to buy your first house.
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