Lifetime ISA vs Help to buy (A 3 point guide)

As you are planning your property ladder journey, you may be thinking Lifetime ISA vs Help to buy?

Which is better? Which will get you a bigger government bonus? Which will you be able to use for your mortgage deposit?

Lifetime ISA vs Help to buy ISA

The lifetime ISA and the help to buy ISA are both first-time buyer government schemes meant to help you get on the property ladder quicker and with a smaller mortgage deposit if possible.

Both the lifetime ISA and the help to buy ISA are tax free.

	Lifetime ISA(For Home Purchase)	Help to Buy ISA
Max Contribution	£4,000/year	£2,400/yr (£3,400 in year one)
Lump sums	Yes	No, need to save monthly
Max bonus	£33,000 (assumes max contribution every year from 18-49)	£3,000 (assumes max contribution over four years and eight months)
When is the bonus paid?	First year’s bonus paid in April/May 2018; after which it’s paid monthly	On completion, when you buy a home
Investment option too?	Yes, via stocks and shares Lifetime ISA	No. Cash savings only
Max property price	£450,000	£250,000 (£450,000 in London)
How quickly can you use it?	After the Lifetime ISA has been open for 12 months	Once you’ve £1,600+ saved (can be done in min 3 months)
Who can open it?	Anyone aged 18 to 39	Any first-time buyer aged 16+
What can it be used for?	The home deposit and the mortgage deposit	Just the mortgage deposit
Can I withdraw money if I am not buying a home?	Yes, at age 60+; if earlier you don’t get the bonus and will pay a penalty	Yes, at any time, you just don’t get the bonus

What is the Lifetime ISA?

The lifetime ISA is a financial product that allows you to put a maximum of £4000 a year in it compared to the Help to buy ISA which allows you only £2400( excluding your initial first deposit limit of £1000 extra). The Lifetime ISA can either be shares & stock ISA or a cash savings ISA. The lifetime ISA is designed to help first-time buyers with a deposit for their first home or for retirement savings.

A first-time buyer is someone who has NEVER owned a property anywhere in the world before- this also includes properties in trust or in a will.

**However, you are still a first time buyer if: **

(a) you are named as a beneficiary of residential property in the will of a person who is still living; or,

(b) if the trust to which you are or were a beneficiary was only created for the purpose of selling the property and other assets following a death or divorce, and the title of the residential property was never transferred to your name or to a trust which you are an ongoing beneficiary; or

(c) if you are only acting in a trustee role and will not be entitled as a beneficiary in the future, (and do not have any other interests in residential property).

For a first-time buyer to be eligible for the scheme you must be buying a property that costs a maximum of £450k in the UK.

The scheme is available per person and if you are buying a house with someone who is also on the scheme the max limit of £450k does not double.

You can mix the Lifetime ISA with other government schemes such as the help to buy equity loan or the London help to buy equity loan. Similar rules apply for those respective schemes so you cannot rent or sell the property within 5 years and you will begin paying interest rates on either of those loan schemes after year 5.

Your Lifetime ISA can only be used towards your new home as a qualifying first-time buyer if you have had your lifetime ISA account open for 12 months.

The Government pays a 25% bonus on your savings every year and if you have the maximum of £4000 deposited in your account you will earn £1000 for that year.

The bonus is however only paid on contributions you put into the account( the government bonus is also considered a contribution by you) and not on the interest gained by the account or any capital growth.

The bonus payments cease when you are 50. The maximum bonus you can receive from the account is £33,000. To be eligible for a Lifetime ISA you have to be between the age of 18-40 on opening the account.

What is the Help to Buy ISA and how does it work?

The help to buy ISA is a first-time buyer cash ISA which allows you to earn a government bonus of up to £3,000 if you save the maximum £12,000 available.

You can pay £4,000 per year into your lifetime ISA and then receive a 25% government bonus. This means you can earn a tax-free £1,000 government bonus from your lifetime ISA. You can use this money towards your mortgage deposit.

Yes. You can access your lifetime ISA without having to pay a fee when you turn 60. You can make full or partial withdrawals from your lifetime ISA.

Your withdrawals will be tax-free and you can use the money as you please.

You can access money in your Lifetime ISA, including the government bonus and without paying any tax if:

• Once you are 60
• If you are diagnosed with a terminal illness
• you’re buying your first home and your account has been open for 12 months.
• If you close your account during the cooling off period, you won’t get the 25% bonus.

You can have a Help to Buy ISA and a Lifetime ISA.

However, you can only use the bonus from one of them towards buying a home.

Use the Help to Buy ISA for the 25% bonus and you’d have to pay a penalty to use your Lifetime ISA savings for a property. Though you’d still be able to use it and get the bonus for retirement savings.

The Help to Buy ISA was launched in December 2015, and like the Lifetime ISA, it has a 25% bonus that’s added to what you save but this bonus is limited at a maximum of £3,000.

You can use the help to buy ISA towards your first home.

While the Lifetime ISA allows you to save more, the Help to Buy ISA wins in some regard as the table shows:

Yes, but you should seek independent financial advice before transferring your help to buy ISA into your Lifetime ISA as the jargon can be somewhat confusing.

Yes, you can have both but you can’t use the first time buyer bonus on both. You can use the Help to buy ISA bonus for your home and the Lifetime ISA for retirement.

A lifetime ISA will allow you to earn more from the government and will allow you to potentially earn more by investing in much riskier stocks and share products rather than simply cash.

Alternative Government schemes for buying a home

Government schemes help you reduce the amount of mortgage deposit you may need to put down, reduce the price of the property or create a structure that increases your mortgage affordability much sooner than it would have been.

Some of these include first-time buyer government schemes whilst others in this list are accessible to you even if you are not a first-time buyer.

Government schemes are not available to you if you are getting a buy to let mortgage.

The Government schemes include:

• Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
• Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
• Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
• Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
• Right to buy– allows you to buy your home at a discount price.
• Preserved right to buy– same as above.
• Right to acquire– similar to the above.

Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.

Use a mortgage broker for your mortgage in principle

You may want to use an independent mortgage broker to help you get a mortgage on your new home.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.

This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. 

This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.

It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.

They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.

This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.