If you are one of the 37% of people in the United Kingdom that has not bought their own house, then the Government has introduced schemes which are designed to help you get your foot on the property ladder (for buy to own, NOT buy to let).

Two such products are the Lifetime ISA (LISA) and the Help to Buy ISA which both offer a bonus of 25% of the maximum amount saved.

If you are looking to save some money for a deposit, which one should you invest your savings into?

If they offer the same bonus, then does it matter which one you choose?

Help to Buy ISA

The Help to Buy ISA was released in 2015, as a way for investors to put away a set amount of cash each month, which would be topped up when they deposit, and was used on a first time home purchase.

How Much Can I Invest?

There is a deposit limit of £1,200 in the first month, and then up to £200 in subsequent months, up to a maximum allowance of £12,000 (for a total Government bonus of £3,000).

This means that if you save the maximum for 55 months, you will be able to put down a £15,000 deposit for your first home.

Unfortunately, you need to stick to the maximum allowance each month, as there is no opportunity to invest lump sums.

Who is Eligible to Invest?

The scheme is open for any first time buyer over the age of 16, so this could be a great opportunity for your children to save for their future.

Are There Penalties on Early Withdrawal?

Even if they don’t use it, the full amount saved can be withdrawn at any time without penalty.

The bonus is only applied once the ISA is used at the completion of the purchase, so the account will always reflect the amount saved, in addition to any saving interest.

When Can I Use the Funds for a Home Purchase?

For the saver to be eligible for the help to buy bonus, they need to have invested a minimum of £1,600 into the ISA (which allows for a £2,000 minimum deposit contribution). This can be done in as soon as three months.

Which Homes are Eligible for the Help to Buy ISA

The limitation of the scheme is that the funds saved in a Help to Buy ISA can only be used for a property price up to a maximum of £250,000 outside of London, and up to £450,000 in London.

Given that the Help to Buy Equity Loan applies to homes up to £600,000 in value, the limitation on the total property price is worth considering.

Lifetime ISA

The Lifetime ISA was released back in 2017, but didn’t seem to take off as expected as many of the top banks declined to offer these products to their customers.

It was created as a way for savers to earn up to 25% of all funds saved, either for a first time home purchase, or for retirement.

How Much Can I Invest?

Despite the relative unavailability of these products, they offer the investor the opportunity to save up to contribute up to £4,000 per year into the ISA, which can take the form of a ‘Stocks and Shares’ ISA if you want to take more risk for potentially more reward. This is up to £1,000 every year tax free!

If the investor saves the maximum amount each month for every year that they are eligible to invest in the scheme (from 18 to 49 years old), they will be able to receive a maximum bonus of £33,000.

Who is Eligible to Invest?

The scheme is only available to those who open the account between the ages of 18 and 39.

Are There Penalties on Early Withdrawal?

For the Lifetime ISA, the 25% bonus is paid every month into the account; however there is a caveat that withdrawing any funds from the ISA will incur a 25% penalty.

This is misleading, because if you invest £100 into the account, and earn the 25% bonus, you will have £125 in total, but the 25% withdrawal penalty will be on the full £125, so you will end up with £93.75 which is less than you put in (so be careful!)

This penalty is only applicable if you are withdrawing before the age of 60, where there is no penalty afterward, though for the purposes of this article, I am assuming that you are making the choice between two ISAs to supplement the deposit savings for a first time home purchase!

When Can I Use the Funds for a Home Purchase?

The Lifetime ISA must have been open for 12 months for the bonus to be applied on the first time purchase of a home.

If you are certain that you will be purchasing a home, but it won’t be in the next 12 months, open one anyway as the maximum contribution can be deposited for the bonus at any time.

Which Homes are Eligible for the Lifetime ISA

The bonus can be paid when the funds are used as a full or partial deposit for a property with value up to £450,000.

Even if you eventually decide that you won’t use it for a home purchase, you can continue to save until retirement age to earn the bonus later in life.

Which ISA Should I Use?

The limit on ISA investment is £20,000 in 2018/19, so you could invest £4,000 into the Lifetime ISA, and then have a mix of other ISAs to bring up to the limit.

You could theoretically invest in both the Lifetime ISA and the Help to Buy ISA simultaneously (though you would only be eligible for the first time buyer bonus with one, so you may prefer to use the first time buyer bonus with the Help to Buy ISA, and then save the LISA bonus for retirement.

The good thing about the schemes is that if there are two of you purchasing your first home together, you can both save the maximum amount into each of your ISAs, and both get the full bonus (a not insignificant amount)!

However; if you are looking to choose between the two schemes, you need to ask yourself the following questions:

  • Will I definitely be buying a home in the UK?
  • Where will I be buying my first home?
  • When will I be buying my first home?
  • What is the value of the home I am looking to buy?

Make sure to assess your circumstances, and pick the one which works best for you.

Good luck!