First time buyers who are looking to buy a new home in the near future and who want to take advantage of the generous Government bonus offered by the Help to Buy (H2B) ISA, need to be quick, as the product will be withdrawn from sale on 30th November this year.
Anyone who has a H2B ISA account open by this date can continue contributing to it until 30 November 2029. The only other deadline is that the Government bonus, paid when you use your account to buy your first home, must be claimed by 1 December 2030 or you'll lose it.
The H2B ISA was introduced on 1st December 2015 to provide “direct government support” to help “generation rent” get onto the housing ladder.
And with a generous 25% bonus on the amount saved, which is added at the point of completion of the property, many first time buyers have taken advantage.
So, should future first time buyers be disappointed that they won’t be able to open a new account after 30th November?
The good news is that the launch of the Lifetime ISA (LISA) in April 2017, has really superseded the Help to Buy ISA and, in many ways, the LISA is actually a far better product.
So, if you are yet to open either, which should you choose? Can you open one of each?
As the name suggests, the Help to Buy ISA is a savings account designed to help first time buyers – so the bonus is paid on the completion of the purchase of your first home.
The Lifetime ISA has two objectives to save towards – the purchase of your first home and/or to help boost your retirement income.
Both of these ISAs offer an excellent Government bonus of 25% on each deposit made but the maximum bonus available on the H2B ISA is £3,000 compared to as much as £33,000 on the LISA, as you can receive the bonus on up to £4,000 deposited per annum from the age of 18 to 49.
In fact, as the Help to Buy ISA is a cash ISA and the Lifetime ISA is a stand-alone ISA type, you could open both in the same tax year without falling foul of the ISA rules. However, crucially, you could only use the 25% bonus from one of these vehicles for the purchase of your first home.
If you hold both accounts and use the H2B ISA for your first home, you’ll have to keep the lifetime ISA until at least the age of 60 – or suffer a steep penalty for earlier access.
If you are just looking to save towards the purchase of your first home, arguably the LISA is the better bet. You can deposit more each year (£4,000 per annum as opposed to £200 per month) and the 25% bonus is added to the Lifetime ISA the month following each deposit that is made, so that the deposit and the bonus can earn interest until the account is cashed in. This compounded interest could make a big difference over time. The bonus on the H2B ISA is simply paid on the completion of the property and is based on the amount in the account.
With the LISA, the price of the property you are able to buy can be up to £450,000 regardless of where in the country it is, as opposed to the H2B ISA, which restricts the price of any property outside London to £250,000.
However, you have to hold the LISA for at least 12 months before you can use the bonus, so it would not be appropriate for those looking to buy their first home sooner than this.
Although the LISA can be used to save for a first home or retirement, it can only be cashed in before the age of 60 if it is to be used for the purchase of your first home. If you try to take money out before the age of 60 for any other purpose, there will be a hefty penalty, which would more than wipe out any benefit of the Government bonus.
With the H2B ISA you can choose to cash it in at any stage and if the proceeds are not for the purpose of a first home purchase, you’ll simply not receive the bonus – but any interest earned will be yours. The good news is that H2B ISAs are paying far more competitive rates – up to 2.55% from Barclays – than the LISA, or indeed standard cash ISAs or savings accounts. In fact, there are only four LISAs to choose from – the best being available via a financial app called Moneybox, paying 1.40% tax free/AER.
Whilst both the LISA and the H2B ISA offer a great boost for those saving for their first home, as ever, it can be tricky deciding between them. And as ISA rules can be complex, it makes sense to take time to choose carefully, picking the best option for your needs, without falling foul of the rules.
For help in navigating the ISA maze, download our free guide.