If you’re a first-time buyer, it can be difficult to know which savings accounts are most suited for you to put away money for your dream home.
The Benefits of a Higher Home Deposit
Both Help to Buy ISAs and Lifetime ISAs are ways of saving for your deposit on your first home. The bigger your deposit is, the lower your interest rate tends to be on your mortgage because lenders see you as a lower risk borrower.
Help to Buy ISAs
Help to Buy ISAs are a government scheme that launched in December 2015 and closed in November 2019. To qualify, you had to be a first-time buyer living in the UK, aged 16 or over. Whilst you can no longer open up a new account, you can still pay into existing ones until November 2029.
You could pay £1,200 into your account in the first month and can make additional payments of up to £200 a month. When you have at least £1,600 in your account, you qualify for a government bonus of 25%, meaning the government adds to your savings pot. So, if you put in this £1,600, you get an additional £400 free of charge, making your savings total £2,000.
However, you are only allowed to save up to £12,000 in these accounts (with a maximum government contribution of £3,000, which would make your savings total £15,000).
The money you save can only be applied to homes worth up to £250,000 in which you intend to live in. If the home is worth more than this, you can’t get this government bonus anymore
Lifetime ISAs
The Lifetime ISA scheme was announced in March 2016 and launched in April 2017. They are for people saving to buy their first home or for later life. To set up an account, you have to be over 18 but under 40.
You can only make authorised withdrawals if you’re buying your first home, are aged 60 or over, or have a life expectancy shorter than 12 months. If you make an unauthorised withdrawal, you face a 25% withdrawal charge.
You can pay up to £4,000 a year until you reach age 50. Just like the Help to Buy ISA scheme, you qualify for a 25% government bonus.
You can only use its savings for a deposit on your first home if you wait at least 12 months after setting up the account to make the purchase.
Help to Buy ISA Versus Lifetime ISA
If you were to contribute the maximum amount every year to a Lifetime ISA, you could end up saving £128,000, qualifying for a government bonus of £32,000. Your maximum overall savings would then total £160,000.
Therefore, the potential government bonus you can claim is far higher than that for Help to Buy ISAs. Many first-time buyers purchase homes long before the age of 50, so it’s unlikely you would save this much towards a house deposit. However, given that the amount you can contribute each year is far more than that of a Help to Buy ISA, you still have the potential to benefit from higher government bonuses.
Lifetime ISAs can be applied to houses worth up to £450,000, which is far higher than the £250,000 Help to Buy limit.
For both schemes, if you’re buying a property with someone else who has an account, you can both claim the 25% bonus. The bonus is applied to the person, not the property.
Should I also use a Lifetime ISA to Save for Later Life?
This decision is completely up to you. However, Lifetime ISAs seem much better suited to first-time buyers than to those saving for later life.
It’s worth just sticking to your pension. This is because the tax relief and employer contributions that you get with your pension works out as a bigger bonus than the 25% Lifetime ISA bonus.
Pensions also work on a system of compound interest, whereas the bonus to a Lifetime ISA is only added at the end of a year. Lastly, the pensions lifetime limit is far higher than the Lifetime ISA maximum contribution.
Key Takeaways
Overall, it seems that Lifetime ISAs offer more than Help to Buy ISAs in terms of savings opportunities for your first home. You can put it towards higher priced homes, save more money, and benefit from higher government bonuses.
However, it’s not really worth setting up a Lifetime ISA if you’re using it for later life rather than your first property purchase. For this, stick to your pension.