31 Jan 2022
Lifetime ISA or Help to Buy ISA – Which Is Best for First-Time Buyers?
Getting on the property ladder can seem impossible to some. But there are schemes and saving accounts out there to help first-time buyers save a big enough deposit to purchase their own home, including Help to Buy and Lifetime ISAs.
If you’re looking to start saving, or you want to know how to make the most out of your current savings, it can be useful to understand the difference between these types of accounts. It’s important to note that the original Help to Buy ISA closed in 2019, but if you already have one you might be wondering whether a Lifetime ISA is better suited to you. There is also a new Help to Buy Equity Loan which launched in April 2021 and will run up until 2023.
Lifetime and Help to Buy ISAs can help first-time buyers wanting to buy their first home and get a mortgage. With the money saved, the government will add 25% to these savings (with a maximum bonus in place). But which is the most beneficial? This article will look into the main differences between the two types of ISAs so you can decide which is best for you.
At Mortgages Online, we can offer professional mortgage advice to help secure the best deal possible. If you have any queries about what saving account would be best for you, feel free to get in touch and we would be happy to help.
Everything To Know About Help to Buy ISA (the old version)
From November 2019 new Help to Buy ISA accounts were closed, meaning you can no longer open a new Help to Buy ISA. However, if you opened an account prior to this, you can keep adding savings until November 2029 with another 12 months to claim the bonus when buying your first home.
If you have an account, here’s what you need to know about how to use it.
How it works:
- You can save up to £200 a month, adding up to £2,400 every tax year.
- For every £200 you save, you will get £50 from the government which you will receive when you buy your first home.
- To qualify for the bonus, you need to have saved a total of £1,600.
- The maximum bonus you can get overall is £3,000.
Buying a Home with a Help to Buy ISA:
- You can’t buy a home for more than £250,000 (or £450,000 in London).
- You must be a first-time buyer to have a Help to Buy account.
- If you are buying a home with someone else with a Help to Buy ISA, you can use both accounts, meaning you can get a maximum bonus of £6,000 towards your home deposit.
- To qualify you must be over 16 and live in the UK.
- You can’t rent out the property you buy with a Help to Buy ISA, you must be planning to move in and live there yourself.
Everything To Know About Help to Buy ISA Equity Loan (the 2021 version)
The Help to Buy Equity Loan began in April 2021 and will last until March 2023, available for first time buyers.
How it works:
- You need at least 5% deposit for the property you wish to buy.
- Only valid for new-build flats or homes.
- The government can lend up to 20% of the purchase price or 40% for those in London, you can then borrow the rest from a mortgage lender.
- The loan is interest-free for five years.
- The loan must be repaid after 25 years.
The maximum price of the house you wish to buy will depend on the region you live in which is as follows:
North East - £186,100
North West - £224,400
Yorkshire and The Humber - £228,100
East Midlands - £261,900
West Midlands - £255,600
East of England - £407,400
London - £600,000
South East - £437,600
South West - £349,000
Everything To Know About Lifetime ISA
Lifetime ISA accounts are still available to open, and you can open them with a range of banks or a building society.
How it works:
- You can save up to £4,000 every tax year.
- You will get a monthly 25% bonus from the government on top of what you put in.
- This bonus is capped at £1,000 every tax year.
- The maximum bonus you can get in total is £32,000.
Who is eligible?
Anyone between 18 and 40 years old is eligible to open a Lifetime ISA, but you can pay into one up until 50 years old. You can open one with a bank, building society or investment manager.
Buying a Home with a Lifetime ISA
When using a Lifetime ISA to buy your first home, there are a couple of limitations to be aware of:
- You can only use a Lifetime ISA to buy a home if you’re a first-time buyer. This means you can never have owned a home before. You can also use a Lifetime ISA for retirement purposes.
- You can’t buy a home for more than £450,000.
- You must be planning to live in the home and not rent it out.
- You need to use a traditional repayment mortgage.
- If you’re buying a property with someone else who also has a Lifetime ISA, you can combine your accounts together and use it to buy the property.
- You have to have your Lifetime ISA account for a year before using it to buy a home.
Can I Transfer My Help to Buy ISA or Lifetime ISA?
If you have a Help to Buy ISA and would rather switch to a Lifetime ISA, it is possible to do so. However, transferring accounts will count towards the annual limit for the Lifetime ISA (which is currently £4,000). Your funds will then be eligible for the Lifetime bonus, but you will no longer receive the Help to Buy bonus.
Can I Have Accounts for Both?
You can open and use both a Help to Buy and Lifetime ISA, but you are only able to use the bonus towards your first home from one of the accounts, not both.
Which is Best for You?
Both accounts are great for helping first-time buyers onto the property ladder. Although you don’t get as much interest as other ISAs, the 25% bonus received when buying your home exceeds the amount you would get in interest in a normal cash ISA.
The main difference between Lifetime and Help to Buy is you can purchase a more expensive home using the Lifetime account, and you can put away more money per month in a Lifetime meaning you will be eligible for a larger bonus.
It’s therefore important to think about how much you will be saving each month, and whether you will earn a bigger bonus with a Lifetime account rather than the Help to Buy. If you won’t be buying a property for over a year, it might be worth using a Lifetime ISA as you’ll be able to save more, meaning a bigger bonus when the time comes.
If you require further help, or you’re ready to talk all things mortgages, a member of our team at Mortgages Online would be more than happy to help. Give us a call on 03300 58 60 58 or email us at ask@mortgages.online.
