19 May 2016
What are help to buy and lifetime ISAs?
Over the past few months, the government has introduced two new savings products which should make saving for a house deposit that much simpler for first-time buyers across the country. The Help to Buy and Lifetime ISAs both offer bespoke benefits, but what do they actually do?? Here, Kate Murray, Principality Building Society’s Savings Products Manager, explains what you need to know about these new products, leaving you with the know-how to make a balanced decision when it comes to your savings.
The Help to Buy and Lifetime ISAs were announced by Chancellor George Osborne in the last two budgets and have changed the face of saving for first time buyers across the country. While savers are used to the tax-free benefits of ISAs, the Help to Buy and Lifetime ISAs encourage saving unlike before by offering a 25% cash bonus from the government for the owner when they buy a house. This incentive can really help homebuyers top up their deposit or give you some extra cash in your pocket to go towards the costs of moving or decorating.
How does the Help-to-Buy ISA work?
This ISA, which is on the market now, is specifically aimed at savers buying their first home. Quite simply, for every £200 saved, the government will give you £50, up to a maximum of £15,000. This means if you save the maximum £12,000 you will receive a total of £3000 from the government leaving you with £15,000 – a deposit or at least a good chunk of it. You can start off your ISA with an initial deposit of up to £1,200 and then save up to £200 a month after that. Committing to save up to this amount every month is a good way of ensuring you’re saving regularly, getting you that step closer to owning your own home.
What are the benefits of the Help-to-Buy ISA?
Help to Buy ISAs are available to each first-time buyer, not each household. So if you’re buying a property with your partner, for example, you’ll be able to get up to £6,000 in free money from the government towards your deposit.
What to be aware of with the Help to Buy ISA
There are a few things to be aware of before signing up to a Help to Buy ISA. For instance, if you don’t save anything one month, you won’t be able to make up this missed contribution next month over the £200 limit. It’s also worth bearing in mind that the Help to Buy ISA is available to new savers from now until 30th November 2019. You can keep saving in the account after this date but must have claimed the bonus by 1st December 2030.
How does the Lifetime ISA work?
With a Lifetime ISA, you can save up to £4,000 a year and will also receive a 25% bonus from the government on top of however much you have saved in your account at the end of the tax year towards a house deposit or to use in retirement once you reach the age of 60. To put this into perspective, if you save £1,000, at the end of the tax year the government will top this up to £1,250, or if you save the maximum £4,000 per year, you’ll be topped up to £5,000. As well as first-time buyers, the Lifetime ISA is engineered to benefit people once they hit 60; however it is difficult to compare whether this will beat the benefits of a private pension.
What are the benefits of the Lifetime ISA?
The ISA can be opened by anyone between the ages of 18 and 40 and used up to the age of 50, meaning if you save the maximum £4,000 every year over the maximum term, you’ll receive £32,000 bonus in total over the 32 years (should the rules not change). You also get paid a bonus in the year you buy the home, even if you don’t complete a full year’s saving. As with the Help to Buy ISA, if you’re buying a house with a partner then you can both open a Lifetime ISA, effectively doubling the amount you can save. It has the added bonus of staying open once you’ve bought your house, meaning you can stay in the saving habit and use the ISA for its secondary purpose of retirement funds, if you so wish.
What to be aware of with a Lifetime ISA?
You must have had the ISA open for at least a year to withdraw the money towards a house deposit for a house up to £450,000. In the unfortunate event that your purchase falls through, you won’t lose any of your government bonus and your funds will go straight back to your bank or building society. It does offer some strict rules though. For instance, if you withdraw money from this account other than to buy a house or for your pension, you’ll be hit with a penalty of five per cent and lose your bonus top-up. And when used for its secondary purpose of retirement savings, money can’t be withdrawn until you reach the age of 60 without losing bonuses and incurring penalties.
So, is one better than the other?
When comparing the hard facts, for someone who is saving towards a house deposit, the maximum bonus on offer is slightly higher on the Lifetime ISA at £1,000 a year versus £850 a year for the Help-to-Buy ISA. But ultimately choosing between the two must be based on your personal circumstances. While a Help to Buy suits those who are looking to make small but regular monthly savings contributions, the Lifetime ISA benefits those looking at the long term and larger savings deposits. It’s worth bearing in mind that if you have the Help to Buy ISA now, you can transfer your existing savings into the Lifetime ISA during the 2017/18 tax year and you’ll still receive the Help to Buy bonus.
Between the Lifetime ISA and the Help to Buy ISA, it’s a win-win situation for first-time buyers across the country. Receiving a 25% bonus on top of your hard-earned savings will provide a new incentive that many savers haven’t experienced before. Although we still have some time to wait until the Lifetime ISA launches in April 2017, you can still open a Help to Buy ISA now. Any extra help you can receive from the government along the way will hopefully make your journey to owning your first home that much easier and before you know it you’ll have the keys in your hand.