Help to Buy ISA vs Lifetime ISA

liammmpatrick

Hi,

I am starting to think about buying my first home. I am a single person on a one salary, and after years of spending a lot of money on renting (I live alone), I am moving into a shared flat with my brother, so I can try and save some more/quicker.

In all likelihood I will be purchasing a new build home using the Government Help to Buy scheme before it ends in 2021. My current issue is that I can’t decide whether a Help to Buy ISA or Lifetime ISA would be best for me. Either way, £200 is likely the amount I would be paying in monthly, with a small lump sum at the start (probably £1200 as per Help to Buy max, either way). I shan’t be able to afford to buy within the next 12 months; 24 months onwards is more likely.

Due to my situation, I am currently leaning towards a LISA as the bonus is paid monthly - and I will need as much as possible at the point of paying the deposit, whilst with a Help to Buy ISA I understand you don’t get the bonus until completion? However, what if in 2 years I’m not in a position to buy my first home, and want to withdraw the funds I’ve saved...would the penalty from withdrawing from a LISA be large, would I lose out on any interest gathered?

Many thanks in advance for any advice!

Liam

bowlhead99

liammmpatrick wrote: »

In all likelihood I will be purchasing a new build home using the Government Help to Buy scheme before it ends in 2021. My current issue is that I can!!!8217;t decide whether a Help to Buy ISA or Lifetime ISA would be best for me. Either way, £200 is likely the amount I would be paying in monthly, with a small lump sum at the start (probably £1200 as per Help to Buy max, either way). I shan!!!8217;t be able to afford to buy within the next 12 months; 24 months onwards is more likely.

If you definitely can't afford to put in more than £3000 in during this tax year (£1200 for June and £200 for July to April inclusive) and £2400 in any year thereafter (£200 each month) then it sounds like you could use HTB ISA. The properties you can buy with a bonus from that scheme are restricted to a value of £250k if outside London but (no offence intended) if you're only saving those small amounts for two or three years it doesn't sound like you are going to be buying a big expensive one.

Money put into a HTB ISA does not receive a bonus as you go along so can be withdrawn without penalty whenever you like (eg to put into a LISA or just to spend). So if you think you might give up on the idea of ever buying a house and just go and blow your savings on something else instead, it is a reasonable option.

Obviously the total bonus you can get on the HTB ISA scheme is smaller (because of only being able to put £3000 then £2400 a year into it) and on the grounds that more free money is better, the LISA is a better scheme. It also isn't as restrictive on the property you can buy (higher limit outside London) and as you noted you can use the eventual withdrawal from a LISA (including bonus) earlier in the purchase process, for an exchange deposit rather than only being allowed to use the bonus to reduce the completion deposit or mortgage size. These are positive things which make LISA best for many people.

However, what if in 2 years I!!!8217;m not in a position to buy my first home, and want to withdraw the funds I!!!8217;ve saved...would the penalty from withdrawing from a LISA be large, would I lose out on any interest gathered?

Effectively they want to have some discouragement from people putting money in to a Lisa, getting free money and earning interest on the free money, and then giving up on the scheme. So there's a penalty on whatever you take out if it's not for a qualifying purpose like buying a qualifying property or being over 60.

The penalty is 25% of whatever you take out for a non-qualifying purpose. So as an example:

You contribute £80. They give you 25% bonus (£20) to make it £100 total. Over next couple of years the interest makes it £102.

Then you want to withdraw the £102. The penalty is 25% of £102 which is £25.50. You are left with £76.50.

So in that example you basically lost £3.50 of your initial £80 capital (after the effect of the bank interest, you have lost out on 4-5% of what you started with).

Of course, you only pay the penalty if you actually take it out. You said "what if in 2 years I'm not in a position to buy...". Well, many/most people who aren't in a position to buy in two years time will keep saving throughout their lifetime until they *are* in a position to buy. You can keep contributing up to £4000 a year to your LISA and getting up to £1000 bonus on it every year until you turn fifty years old. And even after 50 you can keep it, you just can't add new money and get further bonuses on top of the thousands they'll have already given you by that point.

But yes if you've been stuffing all your money into a LISA but at some point decide you want to give up on ever buying, or you urgently need the money back because you want to blow it on a nice car, some drugs and hookers, paying the rent, financing a wedding or relocating across the country or across the world to get a better job etc etc., then you will end up with a penalty on everything you take out.

Still, you might not think that sort of penalty is too much of a deterrent to avoid the scheme altogether - because if it ends up that you do buy a property the scheme is very lucrative (moreso than the HTB because of the larger amounts you can put in and bigger overall bonus potential), and if it doesn't work out, a few percent won't be financially crippling, just annoying.

liammmpatrick

Hi,


Thanks ever so much for a v informative response! I didn't realise when posting that not that many providers offer a LISA, so I guess that's something else I have to take into consideration.


Cheers!
Liam