Most people are aware that the Help to Buy ISA closes for new applications on 30 November 2019. Martin Lewis is recommending that people open one quickly with £1, just in case they need it.
There are in fact two similar such ISA currently available and we shall take a look at both. You can open both, but you can only use the government bonus from one when buying your first home. Make sure you do your research and choose wisely. It may be possible to transfer a Help to Buy ISA into a Lifetime ISA. So all may not be lost, if you later prefer the Lifetime ISA. However the transfer will count towards your Lifetime ISA allowance for that year.
We cannot say which one is better for you as it depends on individual circumstances and we cannot give investment advice. Lets compare them though.
How much can you invest?
A help to buy ISA allows you to invest a maximum of £1,000 initially as a deposit and £200 per month thereafter. So that is £3,400 in the first year and £2,400 per year in subsequent years.
A Lifetime ISA allows you to invest £4,000 per tax year.
What about the all important bonus from the government!
So with a Help to Buy ISA the maximum bonus you can earn is £3,000. You need to invest £12,000 to get the maximum bonus of £3,000. A couple can each have an ISA so there is the potential for £6,000 from the government towards the purchase of your own home. The bonus is only paid when you buy the house and you have to have saved a minimum of £1,600 to claim a bonus. The bonus cannot be used against the deposit on exchange only on completion as it isn’t received until completion, so do look into that.
Lifetime ISA allows you a bonus of £1,000 per tax year. If you open it when you are 18 and invest a maximum of £4,000 per tax year until you are 50 then you could earn upto £32,000 of bonuses. Also the bonus is added annually, so you can earn interest on it sooner. That also means the bonus is available to use on exchange.
With a Lifetime ISA you have to be 18 and over but under 40. With Help to Buy ISA you have to be at least 16, but a first time buyer.
Which property can I buy?
Well with both ISAs the property must be your first property, it must be in the UK, it must be the house where you intend to live and not a house you intend to rent out.
With a Help to Buy ISA the house must be less than £250,000 (£450,000 in London) whereas with a Lifetime ISA it has to be less than £450,000.
Can it be used for anything else
The Lifetime ISA can be used for retirement and can continue after you have purchased your first home. If you inherit a home then you can use it for retirement as you won’t be buying your first home. Help to Buy ISA is just to buy a house as the name suggests.
How soon are you hoping to buy?
If you want to buy fairly soon then after investing for 3 months into the Help to Buy ISA, you will have invested the minimum of £1,600, can claim the minimum bonus of £400 and buy your house. Whereas, you cannot use your Lifetime ISA till it has been open for 12 months. It has been suggested that there may be merit in opening a Lifetime ISA with £1 to start the 12 month clock ticking and contribute to the Help to Buy ISA. Then if before the 12 months are up you don’t want to buy, you can transfer those funds across to the Lifetime ISA as it will be a maximum of £3,400 which is less than the £4,000 allowance for that tax year.
If you cannot contribute yet, or are not sure what to do, seek advice and maybe open one with £1. Although some ISA’s may have a minimum investment amount. If you open the Help to Buy ISA with £1, then you have missed out on the opportunity to invest £1,000 as a deposit. It doesn’t affect the position in the long run but it means that it will take you longer to save enough for the maximum government bonus of £3,000.
The Help to Buy ISA is invested in cash so lower risk, whereas the Lifetime ISA is invested in shares and stocks so more risk. However, there are a few cash Lifetime ISAs if you are risk averse.
Just a quick note about using the Lifetime ISA for retirement. It is important to consider your options. A workplace pension means that although a basic rate taxpayer only receives 20% (higher rate tax payer may receive more) from the government compared to the 25% on the Lifetime ISA, you do benefit from your employer contributing into your pension for you depending on your circumstances.
So you really do need to weigh up what you are investing for and what works for you. Everyone will be different. Review all your options carefully.
Withdrawing from the fund
If you take your money out of the Help to Buy ISA for any other reason than buying that house, you won’t get your bonus payment. If you take your money out of the Lifetime ISA for any reason other than buying the house or retirement after 60, then you are charged 25% penalty on the amount withdrawn. That is probably on the basis that you have had the 25% bonuses already added. However, depending on how much you extract it could actually mean you lose some of what you put in. There are some exemptions from the penalty charge on withdrawing funds in the case of terminal illness, as one would hope to see.
Your age, the value of house you want to buy, how much deposit you need to save up, when you hope to buy and whether you want a longer term ISA will all factor into the equation. You may open both to fulfill different purposes. This is just an overview so do seek advice specific to your circumstances.
The important thing though is to research and be sure of what you are trying to achieve. Then compare all the alternatives on the market and ask the providers of the ISAs lots of questions, to make sure you are happy with what you have chosen to invest in.
I only wish I was still younger than 40!!