Getting on the property ladder can be one of the most exciting times of your life. More Than Money talks first-time buyers through the process.
According to research conducted by Skipton Building Society, the national average for a first-time buyer in the UK is 30 – unless you were one of the savvy folks who opened a Help To Buy ISA, in which case you’re going to be mere whippersnappers at only 28 when you first start looking to buy a house.
ISA’s your options explained
The Help To Buy ISA scheme closed to new customers back in November 2019 by the way, just in case you were about to start googling it, but could having a Lifetime ISA instead be just as good – if not better? And, if you do have a HTB ISA, should you consider transferring to a Lifetime ISA instead?
Aside from the fact that savings accumulated on average one month faster for those with a HTB ISA than a Lifetime ISA, what other differences are there?
What Is A Help To Buy (HTB) ISA?
Let’s start at the beginning shall we? Sure, you can’t get one anymore, but existing account holders can still use theirs to save towards their first home.
These ISAs were designed to allow first-time buyers to save for a deposit for a house, and then receive a government bonus when they’ve bought one. Every £200 saved would be rewarded with a £50 bonus towards the purchase price of your new home. In effect, the government gives you a 25% top-up on savings up to £12,000. And, as with all ISAs, any savings deposited aren’t taxed.
If you have one of these ISAs, the good news is that you can still use it to buy your first home and benefit from the 25% bonus up until December 2030.
But would it be better to transfer to a Lifetime ISA?
What Is A Lifetime ISA?
A Lifetime ISA is also a tax-free savings or investment account and was designed to help people aged 18-39 buy their first home or save for their retirement. Only first-time buyers can use these savings to buy property and get on the property ladder, and only if under the age of 60.
The difference between this and an HTB ISA is that the government adds a much less generous-sounding £1 to every £4 you save. You can save up to £4,000 a year and if you are less than 60 years old the cash saved must be used to buy a property. If you don’t buy a house, and you hang onto the ISA until you are over 60, you can spend the money on whatever you like.
Are Lifetime ISAs More Useful To First-Time Buyers?
As I’ve already mentioned, according to Skipton Building Society’s research, those who have HTB ISAs tend to be in their new home quicker – within 15 months, and at an average age of 28. Lifetime ISA savers have normally landed their house within 16 months, and at an average age of 31.
This difference is probably because those with Lifetime ISAs generally buy more expensive properties – at an average cost of £193,224 according to Land Registry data. A 5% deposit on that property is going to set you back £9,662 – a sum that you would be able to save within 16 months with a Lifetime ISA – but not with a Help To Buy ISA.
If you had a Lifetime ISA, and saved the maximum you could during that time; £4,000 in one tax year, you would have earnt £2,000 in government bonuses and saved a total of £10,000 over the 16 months.
Not bad, eh? One rung closer to getting on the property ladder.
However, if you had a Help To Buy ISA, you could only save a total of £4,400 in the same time. Add on your government bonus of £1,100 and you still fall short with a grand total of £5,500.
Help To Buy ISAs Vs Lifetime ISAs: The Facts
If you have a Help To Buy ISA, and haven’t yet put the cash towards your first house, you might now be considering transferring your savings to a Lifetime ISA instead.
Let’s take a look at the difference and similarities between the two:
- This is a cash only ISA, you can’t use it to invest in stocks and shares, so the value of what is in your ISA will stay the same – until you spend it!
- They’re no longer open to new savers. If you already have one you have until the first of December 2030 to use the money to buy your first property and receive the 25% government bonus.
- During the first year you would have been able to pay a maximum of £3,600 into your ISA, and then a maximum of £2,400 every year after that.
- When you first opened the account you could have paid in a lump sum of £1,200. After that you were limited to paying in £200 a month.
- When you’ve saved £12,000 you receive a bonus of £3,000. Lovely stuff.
- The bonus is paid upon completion of you buying a house.
- The maximum price you can pay for a property using your savings from a HTB ISA is £250,000 (or £450,000 in London).
- You could’ve used the cash in your ISA to buy your first house when you’d saved at least £1,600 and earned the minimum bonus of £400. This would be possible within three months.
- 26 providers offered HTB ISAs – it was closed to new savers on the 30th of November 2019.
- You can transfer up to £4,000 into a Lifetime ISA during a tax year, but you won’t receive the Help To Buy ISA bonus.
- You weren’t able to open more than one HTB ISA.
Lifetime ISAs are open to new savers and can be opened by anyone aged between 18 and 39. If you want to use the money from your Lifetime ISA to buy a property, you can’t have owned a house before.
- You can pay up to £4,000 into your Lifetime ISA in a tax year.
- If you do deposit the maximum of £4,000 a year you’ll receive a £1,000 bonus. Hooray!
- You can’t pay into the account after the age of 50, so obviously your bonus payments will stop too.
- The government bonus is paid monthly into your account – so no waiting until you’ve completed on your first home to get your hands on that extra cash.
- You can use the money saved in a Lifetime ISA to purchase a property up to the value of £450,000, anywhere in the UK….
- ….and you can do that once you’ve held the account for at least a year.
- There are 15 UK providers who offer Lifetime ISAs.
- With a cash Lifetime ISA there are no fees to pay. Stocks and shares Lifetime ISAs charge a fee for managing your investments.
- If you want to transfer your savings from a Lifetime ISA to a different type of ISA you’ll be charged a withdrawal penalty.
- You can open more than one Lifetime ISA, but you can only pay into one each tax year.
Of course, an ISA isn’t the only way to save money to buy your first home, so if you decide that it’s not for you, what are your other options?
A Savings Account
A good instant-access savings account has an interest rate of roughly the same of some cash Lifetime ISAs – but without the government bonus. These types of savings accounts allow you to withdraw and deposit cash whenever and as often as you like with no amount restrictions, which offers you more flexibility than an ISA.
If buying a house is a few years away for you yet, but you already have a lump sum ready to deposit, then a fixed-term account is an option. The interest rate doesn’t change on these accounts, whereas Help To Buy ISA and Lifetime ISAs are both variable-rate, meaning the interest rate can change at any time.
It’s worth noting though that if you save a lot of money in a savings account instead of in an ISA you might have to pay tax on the interest you earn.
So thats How to for getting on the property ladder. Happy house hunting and we hope to hear from you soon.
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